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Mortgage Refinancing 101

Most homeowners when taking out a mortgage, opt for either a 15 year or 30 year loan repayment schedule. On average, families will refinance their mortgages every 4 years as personal situations change, or as the broad economic landscape changes.

Refinancing can make long term financial sense, although borrowers need to recognize there are short term expenses associated with refinancing, as loan fees are incurred to process the refinancing transaction.

When Does Refinancing Make Sense?

To decrease interest rates as market conditions change
To lock in fixed payments, and transition from an adjustable rate mortgage
To improve terms of adjustable rate mortgage
To “cash out” a portion of home equity to meet short term financial obligations
To better align monthly mortgage payments with overall family income
To consolidate monthly bills into a single tax deductible payment
To finance a necessary major home repair or remodeling project
To accelerate payoff terms by switching from a 30 to 15 year loan
To reduce monthly payments by switching from a 15 to 30 year term.

Personal Factors to Consider When Deciding Whether or Not to Refinance:

How long do you plan to stay in your current home?
Will you incur prepayment penalties with current mortgage?
In addition to interest rate changes, what short term fees will be incurred with completing the refinancing
How will your tax obligations be impacted?
How will your new monthly payment impact your ability to meet other financial obligations?

Refinancing is a major financial decision and should always be taken seriously. Many times, once the numbers are crunched, it is clear to see the many advantages that a restructuring of your loan makes sense for your personal situation. Refinancing is never encouraged to facilitate irresponsible spending or as a temporary solution that complicates your longer term financial security. When used as an innovative and responsible financial instrument, refinancing can be a useful tool for many families.