Refinance Or Not

One of the questions home owners across the United States are constantly pondering about is whether to refinance or not a fresh mortgage for their home. This is even a hotter topic today as the feds slashed the mortgage rates a couple of times in the recent past. Many home owners not so surprisingly did go ahead and refinance their mortgages amidst the lower mortgage rates while some others waited hoping that the rates would dip further. The ones who decided to wait obviously took a risk of facing higher interest rates if the mortgage rates went up again in the near future.

Let us go through some of the basics of refinancing. If you currently have a mortgage then you have the option of completely or partially refinancing that mortgage. There are two types of interest rates which are usually available when refinancing. You have the fixed interest rate option wherein the borrower will pay a fixed monthly amount towards the payment of the loan for the entire duration of the loan. The other option is have a variable interest rate which is determined by the current market condition. So the monthly payment towards will change as the interest rate will change from one month to another depending on the market dynamics.

Before going down the refinancing path a borrower must to some basic analysis to ensure that the new financing option will benefit him in terms of savings. First and foremost the borrower has to identify what were the reasons that his initial financing was at higher interest rate. Was it because the markets were higher or was the borrower’s credit history weaker when the loan was purchased? In either case if the situation has improved today then it makes sense to go for refinancing option. Also the borrower has to ensure that the amount he/she will save by refinancing the loan is greater than the cost that will be incurred on refinancing the loan otherwise it seems pointless to go through the whole process without getting any benefit out of it. Apart from the saving benefit of refinancing at a lower interest rate, the refinancing may also fetch the borrower a tax benefit. (Please consult a lawyer on the specific clauses of Tax benefit on refinancing).

To conclude, whether to refinance or not depends not only on the lower interest rates but also whether the borrower is seeking enough benefits from the refinance based on the current circumstances he/she is in so it is best to do your homework before a choosing one way or the other.