Refinancing Your Mortgage

What you need to know when searching for a good deal on your home loan

In the past few years, we witnessed a rise in adjustable-rate mortgages, as interest rates dropped to historical lows. Homeowners didn't want to commit long term to their mortgage if rates were going to continue to drop. In hindsight, 2007 has seen rates move the other way - those holding ARMs are now bailing in favor of fixed-rate mortgages and the financial certainty they provide. Mortgage refinancing will see record activity reducing ARM market share, once as high as 33 percent of all mortgages, to below 20 percent.

In this particular instance, it's easy to see why homeowners would refinance. If interest rates move another two percent higher, as they did between 2003 and 2006, many would lose their homes, as is currently happening to sub-prime borrowers.

For those not in this dilemma, there are some reasons to consider refinancing, including the following:

  • Your household income has risen dramatically and you want to pay off your mortgage faster by switching to a shorter term. A $100,000 fixed term mortgage at six percent will cost you approximately $600 per month on a 30-year term and $850 for a 15-year term. Your monthly payment increases by 40 percent but you've paid off the entire mortgage in half the time.
  • You've built up quite a bit of equity in your home over the past 10 years and now you want to use that equity to make investments in stocks, bonds or investment properties, putting your money to work for you.
  • The interest rate on your mortgage is too high and you are confident that you can lower it substantially. In 2007, that's not a likely scenario, given rates have actually risen in the past couple of years.

There are two ways to access equity in your home: cash-out refinancing or a home equity loan . The former involves creating a new loan with the amount of equity withdrawn added to the mortgage balance. With home equity loans, the equity withdrawn rolls into a second mortgage with a slightly higher interest rate than the first. If you are in a hurry to get your hands on the money, home equity loans make more sense. However, if you're looking for the best rate possible, cash-out financing is more appropriate. In either case, do your homework before making a commitment.

Be aware that there are costs associated with refinancing your mortgage. Calculate what those will be ahead of time to justify making the move.

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