Does it make sense to refinance my mortgage?
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Should I refinance?

The most common reason for refinancing is to save money. Some ways of saving money through refinancing can be achieved by:

  1. By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.
  2. By consolidating debts such as credit cards with the refinance so the overall monthly payment towards all debt is greatly reduced.
  3. By reducing the term of the loan, thus saving money over the life of the loan.  For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.

People also refinance to convert their adjustable loan to a fixed loan.  One of THE biggest reasons home-owners will refinance in 2007, is because their ARM mortgage is adjusting or getting ready to adjust.  This adjustment is taking many loans to the upper 7's and 8 percent range.  The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher.  When rates are low, homeowners refinance to lock in low fixed rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.

Homeowners also refinance to consolidate debts and replace high-interest loans with a low-rate mortgage.  The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc.  In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is usually tax deductible.

The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are in the exact same situation.  Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true.  If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:

  1. Calculate the total cost of the refinance––example: $2,000
  2. Calculate the monthly savings––example: $100/month
  3. Divide the result in 1 by the result in 2––in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.

Sometimes, you do not have a choice––you are forced to refinance.  This happens when you have a loan with a balloon provision, but with no conversion option.  In this case it is best to refinance a few months before the balloon comes due.  It may also be that you would like to fix your adjustable rate mortgage, or your ARM is getting ready to adjust to a much higher rate.

If you are forced to refinance due to a separation and divorce and you need to buy your spouse's equity... we can help you.  Let's say two people are separated for a couple months.  The husband wants to buy a new property and the wife is going to continue to live in the marital home.  Most lenders want 12 months cancelled checks to not have to count that payment against him.  We have loan programs that don't have this requirement.  We will require one of two things; 1) A copy of the separation agreement stating that the wife is going to be responsible for the mortgage, or 2) Get a letter signed and notarized by the husband and the wife stating that the wife is going to remain in the property and be solely responsible for the payments.  No separation agreement?  No problem...  

Also, if your credit scores are high enough we will ignore late mortgage payments if you provide a copy of the separation agreement.


Protecting your credit during divorce
ARM coming due
How to shop when refinancing
Does it matter if I close at the end of the month?