Why Refinance My Home

The question of whether to refinance a home mortgage usually comes up when interest rates drop significantly, leaving the homeowner with an original mortgage rate that is higher than the new current rate. Still, many people are not sure that a refinance will end up saving them money over the term of the loan. A look at the factors that affect savings will determine if a refinance is a wise move.

Refinancing Your Home Loan

Basically a refinance loan pays off your existing loan, replacing it with a new loan at different terms. A lender will usually advise a borrower to consider a refinance if the current lending rates are lower than the rate on the original loan by at least two percentage points. However, this is just a starting point for figuring savings. A smart borrower will look at the fees and points on the refinance loan before deciding to go ahead with it.

A point equals one percent of the total mortgage value. If the refinance loan includes points it will add to what is owed on the loan balance, thus diminishing or eliminating any savings. Bank fees, incurred on any new loan, could be high enough to lessen the gains made with a lower interest rate. Some refinance loans come with a slightly higher rate but no fees and points. These "no-cost" loans are a possible option for borrowers who will not get good savings with a loan that is laden with extra costs.

Refinancing a mortgage requires some research into the current deals. Some lenders are willing to negotiate the fees or even waive some of them altogether. In a competitive lending market, the borrower has some leverage when taking out a refinance loan. A good rate with limited fees and points will net out a loan that will accomplish the goal of significant savings over time.