Should I Refinance?

This is one of the most frequently asked questions from clients.  Here are some rules of thumb:

• Mortgage rates are historically low right now and most likely the lowest we will ever see so it is wise to take advantage of the opportunity in today's economic environment
• You need to have at least 20% equity in your home to refi
• You should be planning to stay in your home for at least 3 years or longer to offset the cost of the refi
• It only makes sense if you can lower your interest rate by a 1/2 percent or more
• Always get a fixed rate loan

Many folks think that getting a 15 year loan is a smart deal as their house will be paid off quicker.  While that is true, I always counsel folks to get the 30 year fixed loan because it doesn't lock you into the higher payment.  And you always have the option of paying extra principal on your loan and shortening the payoff time.  And, for example, what if you lost your job or had significant unexpected expenses to deal with, then the 30 year loan is a welcome relief.  A 30 year loan gives you peace of mind at night. 

What about the costs of refinancing?  Many mortgage companies promote "no cost mortgages" This certainly sounds appealing.  You pay no costs to refinance.  But is it truly free?  Unfortunately, there is no "free lunch" in business.  You will pay these costs one way or another.  Your interest rate will be higher with the "no cost mortgage".  Anywhere from .5% to 1.25% and over the period of 30 years, this higher interest rate really adds to the cost of the loan.  In most cases, it makes more sense to pay the closing costs either out of pocket or added to the loan balance. 

Bankrate (www.bankrate.com) is a good place to start to get an idea of the current refinance rates.  That way, you are are prepared to talk to a lender with competitive information.  The refi marketplace is highly competitive so do your homework!