Is It Time to Refinance Your Mortgage?

Sometimes, refinancing may help homeowners reduce expenses.

Thinking of refinancing your home? Mortgage interest rates are low, but a lower interest rate isn’t the only thing to consider.

Ron Nawrocki, a real estate investment fund manager and host of radio’s Wealth DNA, suggests asking yourself:

What’s your home actually worth, compared with the amount of the mortgage? If your home isn’t worth as much as you owe on the mortgage, refinancing may not make sense. A home valued at $75,000 with a $100,000 mortgage balance may qualify for a loan of $60,000 or $65,000.

“That means you have to bring $40,000 to the closing transaction [which] makes no sense for most people,” Nawrocki says. “In that case, if you can afford your current mortgage, leave it alone rather than refinancing at a lower rate.”

What’s the term of your current loan and what will it be when you refinance? Going from an interest rate of 5 percent to 4 percent can save you money every month. But if your 5 percent loan has only 15 years remaining and the new 4 percent loan will reset to a 30-year term, you’ll end up paying more interest in the long run.

“Your monthly payment may go down from $1,000 a month to $600 a month, but be sure to calculate what you’ll be paying over the life of the loan,” says Nawrocki.

If you think you can pay off the new loan before the end of the original term—say, within 15 years, instead of 30—this could be a smart strategy.

How long do you plan to stay in your home? If there’s a chance you’ll move within a few years, refinancing may not be wise. You could get stuck paying off a mortgage with an interest rate higher than the one you had before refinancing.

Are you having trouble refinancing because your home value has declined? Consider the federal Home Affordable Refinance Program, which is designed to help homeowners get a more affordable mortgage.

“If you’re underwater on your mortgage, but have been keeping up with your payments, the program could save you $300 to $800 a month,” says Nawrocki. “That’s real money.”

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