Refinancing has become a popular buzz word in the mortgage and real estate industries. There are a number of reasons to refinance as well as a number of ways to go about doing it.

However, refinancing does not always guarantee you are making a wise decision. Just like when you took out your original mortgage, you still have to make sure you do your homework and research different terms and programs thoroughly. Or maybe that is why you are refinancing, because your original mortgage was borrowed with terms or rates you are not comfortable with.

The article, “Refinancing” posted on hothomeloansonline.com presents the most common reasons to and ways to accomplish refinancing successfully.

“Refinancing your home can be an excellent way to bring down your monthly mortgage payment, raise cash, or consolidate debts with high interest rates. However, you need to do your homework before deciding to refinance. One important factor is the difference between current interest rates and the rate of your original loan. You also need to take into account the amount of time it will take to recoup the costs of refinancing.”

The first step is usually to identify why you would want to refinance. The most common reasons to refinance are to lower your monthly mortgage payment, convert and adjustable rate mortgage (ARM) into a fixed one, obtain additional funds for family expenses such as college tuition and to pay off a higher interest loan.

The basic rule of thumb is to refinance your loan or mortgage if the available interest rates fall two percent or more.

“That's because refinancing usually involves most of the same closing costs (loan origination fee, prepaid interest, etc.) as the original loan. For anything less than two percent, the savings on your monthly mortgage payment might not be significant enough to be worth your while.”

You also need to determine how long it will take you to actually save money by refinancing.
“For instance, if it costs $3,000 to refinance a house, and the monthly mortgage payment is lowered by $90, it would take almost 3 years for the savings to cover the costs of refinancing.”

However, if you go through the same lender as with your original mortgage, you may be able to get the closing costs and other fees waived. This would save you a couple thousand dollars and now that combined with a $90 monthly savings may be worth refinancing.

You may be thinking that a savings of $90 per month is definitely worth refinancing, but remember, that when you refinance, the time it takes to pay off the entire mortgage usually increases by about three years.
“Timing can also be a factor in switching from an ARM to a fixed-rate loan. For example, rising interest rates might influence you to covert your ARM into a fixed-rate loan if you plan to stay in your house for several more years.”

Refinancing can increase your monthly cash flow in a variety of ways but some can be dangerous. Always remember the extra time that may be added to your mortgage and closing fees.

Refinancing is easy to get excited about because you see interest rates are now lower than your current rate and you think this will automatically save you money. But as discussed, this may not always be the case.