Determining when to Refinance Your Home Mortgage

Many homeowners feel lost and confused when it comes to their finances. The real estate downturn and subsequent increase in foreclosures has created an atmosphere of panic, and you might have thought to refinance your home mortgage in order to free up some cash.

When you refinance your home mortgage, you tap the equity that you've already built in your home. For example, you might own a $300,000 house, but you've only paid $100,000 toward the principle. This means that the bank might let you borrow against that $100,000 with a loan or line of credit.

Longevity

The first thing to consider when you want to refinance your home mortgage is how long you plan to maintain ownership of the property. Refinancing when you might move in one or two years doesn't make much sense because you'll have to satisfy both mortgages with the sale price.

Furthermore, a second mortgage will increase the amount of credit available to you, which might make it difficult to obtain new credit cards or loans from financial institutions. The more you owe in financing, the lower your credit worthiness, so consider your other financial obligations and whether you'll want to borrow more money in the near future.

When you refinance your home mortgage to obtain the cash - for bills, home improvements and other purposes - this is often called a cash out mortgage. Rather than using the funds to pay down your initial mortgage, you reserve the money for other reasons.

Interest Rates

It is also possible to refinance your home mortgage to obtain a lower interest rate. You can use the cash obtained in the second mortgage to pay off the first, and if you are given a lower interest rate, you'll actually save substantial money in the long run. For example, many homeowners are trying to trade their adjustable-rate mortgages for fixed-rate loans.

This is where your negotiation skills will need to surface. If your credit has improved since you first bought your home, or if refinancing will give you a significant down payment, you'll have some leverage with the bank. Just make it clear that you want a lower interest rate when you refinance your home mortgage.

You can also refinance your home mortgage to obtain a shorter loan. This reduces your interest rate and might give you added negotiating power for that lower interest rate.

Dumping PMI

Private mortgage insurance is another valid reason for wanting to refinance your home mortgage. If, when you purchased your home, you were only able to put 10 percent down, your lender probably required PMI. This can add up over months and years of home ownership, and refinancing might allow you to put down a larger payment and avoid it altogether.

Refinancing your mortgage should be a carefully-considered decision that benefits you in some way, whether it is access to much-needed cash or an investment in your financial future. Don't refinance just to pay off temporary bills; you can take out a personal loan for that or put in some overtime at work. Instead, use refinancing to benefit your home ownership in some way.