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Things To Consider Before Considering A Mortgage Refinance

Updated on June 7, 2009

When it comes to the decision of refinancing your home mortgage, it’s not a decision you are likely to take lightly. Nor should you.

Many people want to refinance in order to get a lower rate and therefore a lower monthly payment on their existing fixed rate mortgage, since today’s rates are a historically low levels. Other people want to refinance to get out of an adjustable rate mortgage because they don’t like the idea of their mortgage payment changing every year. Still others are approaching a balloon payment situation that they will not be able to honor, so they are in definite need of restructuring their home loan.

While getting a new, lower rate, more affordable fixed rate mortgage is certainly an attractive thought, it’s not necessarily a slam-dunk proposition that it will happen.

Especially in today’s market, there are a lot of variables that tend to make it more difficult to refinance than just a few short years ago. So while the historically low mortgage rates of today make it appealing to think about, there are a number of things to consider before taking the step, and potentially committing some of your money to the endeavor.

One of the first things you need to consider is your current situation and your near term plans. If you know that you will not be staying in your current home for very long (not more than another year or two), then it is very unlikely that a mortgage refinance would make any sense for you. The monthly savings you would gain would not be received for long enough to pay off the full cost of doing the loan, so it is really a losing proposition for you. If, on the other hand, you are certain that you will be staying in the house for a while, then perhaps it would make sense to consider a refinance.

The best way to determine this part of the equation is to simply figure out how much you would save every month on the one hand, and on the other you need to know exactly how much it will cost you to get the new loan. Once you have those two numbers, divide the cost by the monthly savings to figure out how many months it will take you to ‘break even’ on the deal. If the number is 24, then that means that in 2 years you will begin to reap the benefits of the new mortgage. If you were to get out of that loan before 24 months, then you would have lost money on the deal.

The next thing you’ll want to check before undertaking a new mortgage loan is your credit situation. Do you think you’re in pretty good shape? Do you know what your credit looks like these day? A lot of people have taken hits to their credit report in these challenging times. You should be keenly aware of the fact that the worse your credit report is, the more difficult and more expensive it will be to get a loan, whether that be a new home loan, car loan or whatever.

If your credit wasn’t that good when you got your existing loan, and you haven’t done anything to improve it since then, then the chances are pretty good that a mortgage refinance won’t make much sense for you. Also, if you had good credit, but you know that you’ve been late on your mortgage payment several times since then, the chances are that your credit score has taken a hit. Again, it’s likely that with a low score, it’s just not going to make financial sense for you to get a new loan.

The best thing for you to do, before sitting down with any mortgage company, is to take a look at your credit report so that you can give honest answers when you are asked about it (you WILL be asked about your credit). There are many different free credit report options you can find on the internet, however you should be careful not to get roped into anything that will cost you money down the road. You are actually allowed to get one free credit report from each of the credit reporting agencies every year. The agencies are TransUnion, Equifax and Experian. Using these direct, free, no strings attached reports is probably the wisest route to go.

Knowing whether you’ll be in your home long enough to warrant a refinance as well as what kind of credit history your credit reports will reflect are two of the most important things to know before starting to investigate your options. Once you have these points nailed down, and if they suggest you move forward, then you may be in an excellent position to take advantage of the low fixed rates that are currently available in the mortgage market place today.


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