Refinance a home, good idea or bad?

As you pay your mortgage each month there will come a time where the thought of refinancing comes into pay. You toy with the idea or dismiss it as a bad idea only to have the thought again later. You should never make any major decision like this quickly or without enough thought and planning. The questions should not only be to refinance or not but when, how and why.

A major consideration is the current rates compared to the rates you are paying. If your current interest rates on your mortgage are higher than what you are paying then refinancing may not be a good idea. Exceptions to this include when you have a large balloon payment coming due that you cant meet or are desperate for cash our refinancing.

It used to be a commonly quoted rule that a 2 percent drop will make a refinance worthwhile. Today a smaller drop of even 1/2 to 1 percent may make refinancing a real money saver. This is especially true of longer-term homes and loans with a variable rate where you have seen the current ra tes lower than your variable rate. A drop of even one percent can make a difference of $100.00 a month or $20,000 or $40,000 over the life of a 30-year loan.

Consider how long you will be with your current home before you consider refinancing your mortgage. You will have to pay some money up front when refinancing. Some of the things you will have to pay for are points, closing cost and possibly another down payment. If you plan to stay in your home for only a short time then the up-front cost of refinancing will not be met over the time you will keep your new home.

For instance you play to stay in your home for 5 more years. The rates dropped a full point and will save you $150 per month. The cost to refinance is $3,000 including closing cost and points. At $150 per month it will take 20 months to break even. After you make the new payment for those 20 months you will then start to save money on the total cost of your home. At 40 months you will have not only broken even but saved $3,000 and at 60 months, or 5 years, you will have saved a total of $6,000.

Another consideration of when to refinance is your credit. Just like when you buy a home you will want to fix any anomalies on your credit report. You will also want to reduce your total amount of debt by paying off smaller loans and credit lines.

Starting early on your refinance project will help you patiently watch for better rates, clear up your credit report and save up money for the points and closing cost. You may want to start as much as a year ahead of time with your planning and savings. Make sure all of the math works out to saving you money before you commit to refinancing your mortgage.