Refinancing Your House
If interest rates are lower than they were when you bought your existing house, and if you plan to stay in your house for at least two more years, consider refinancing. When you refinance, you stay in your current house but get a new loan at a lower interest rate than you got on your first mortgage. Ideally, you want to keep the same number of years in your new mortgage as you have left on your old one.
While you want to shop around for the best refinancing interest rates, also shop around for closing costs — the costs associated with sealing the deal on your refinancing. Your current lender may have a slightly higher interest rate than other lenders, but may not charge you for a new inspection, new credit report, and so on. Keep in mind, too, that you can often roll these costs into your mortgage.
When you refinance, many lenders will offer you cash to pay off your credit card debt, to take a vacation, or to spend on whatever you feel like buying, using the equity in your home (the amount your house is worth minus the amount you owe).
If your debts are crushing you, you may decide to use the equity to pay them off and start with a clean slate. But if you would use that money for anything other than getting rid of large amounts of high-interest debt, don't succumb to this sneaky trick on the part of lenders. They just want your loan to be bigger so they can make more money.
But you want your loan to be smaller — both in terms of monthly payments and the number of years before you pay it off — so don't ever take this option unless you're absolutely sure you will use the cash effectively.
Remember that refinancing your car or house doesn't mean you shirk your financial responsibility on these loans. Instead, by locking in a lower interest rate than you originally borrowed at, you can either reduce your monthly payments or keep the same monthly payments and reduce the length of your loan.
Many people ask how much lower than your current interest rate your new mortgage interest rate has to be to make refinancing attractive. Some say the rule is two percentage points. Others say that even half a percentage point can make a difference for some mortgages.
To find out how much difference one percentage point can make, visit The Mortgage Calculator at SmartMoney.com. Type in your mortgage information, and you can see the impact of changing not only the interest rate, but also any extra payments you might want to make each month (under the prepayments section), lump-sum payments (like putting a bonus from work toward your mortgage), changing the length of the mortgage, and so on.