How to Refinance Your Mortgage

Refinancing the mortgage on your home is a good way to take advantage of lower interest rates and save money. Here is a guide to how to do it.

The first step in refinancing is to figure out whether it is actually worth it. Check interest rates in the real estate section of the Sunday paper, online, and with your mortgage lender. If rates are substantially lower than the rates you are paying, go for it.

Second, you should determine what you want to accomplish by refinancing. Do you just want to take advantage of lower interest rates to lower your payments? Do you want to take advantage of equity on your house to pay off higher-rate debts, such as credit cards? This will influence your decision.

With that in mind, think about what kind of mortgage you want. Fixed rate mortgages are the most popular. With a fixed rate mortgage, you agree at the beginning to pay a constant monthly payment over the life of the mortgage. This way, you are assured that increasing interest rates will not drive your monthly payment up, which certainly does give you some peace of mind. Adjustable rate (or flexible rate) mortgages also are worth considering. With an adjustable rate mortgage, or ARM, you will not be locked into one rate. If you get a raise, or in for some other reason happen to come into some extra cash, you can pay more than your normal monthly payment, thus reducing the amount you will have to pay in interest. If you need to, you will later be able to pay less than your normal payment, effectively reborrowing the overpaid money.

If you are a senior citizen, over sixty, you might consider a lifetime mortgage. With one of these, you will be completely free of monthly payments and free of all fear of repossession. Interest will accumulate on your loan until your death, at which point the money will be recouped.

Another matter to take into consideration is the matter of points. Points are percentage points of the total mortgage that will be paid upon closing. For example, if you had a loan of $200,000 with two points, that would mean an initial payment of $2,000. Points count as prepaid interest, and thus are tax deductible. By getting a loan with more points, you will be able to get a lower interest rate.

Once you know what you want, use an online calculator to calculate new monthly payments. Figure out the savings by subtracting your new rate from your old rate, and divide the savings by the total cost of the loan. This will give you the number of months it will take to recoup your investment. Decide whether it is worth it. If it is, go ahead and refinance!

Tips:

• Don't overestimate how much you will be able to pay-since it means paying less total interest, paying off a mortgage faster looks attractive, but watch out. Too high monthly payments can be debilitating.
• If you are intending to use the equity on your home to consolidate your credit card debt, take into account the current rate you are paying when you decide whether the new rate would be worth it
• Remember that the tax deductions on the money that will pay your loan's interest are only taken out of interest, and thus are not found money