Refinancing a Mortgage

When you refinance, you pay off your current mortgage and replace it with a new one. Refinancing is a good idea only if the benefits are greater than the costs. If you answer yes to one or more of the following questions, it might be time to refinance your mortgage.

  • Are today's interest rates significantly lower than rate you have on your mortgage?
  • Do you have a higher credit score now than when you applied for your mortgage?
  • Do you have multiple mortgages that you want to roll into one?
  • Do you have an adjustable rate mortgage (ARM) that you want to convert to a fixed rate?
  • Do you want to lower your monthly mortgage payment?
  • Do you need cash to pay for a special purchase or to pay off debt?

Things to consider before refinancing

  • What is your mortgage interest rate? It makes sense to investigate refinancing if the interest rate on your mortgage is at least 2 percentage points higher than the current market rate.
  • How many years have you had your mortgage? For the first few years of a mortgage loan, you pay mostly interest on the debt. Only a small portion of each monthly payment is used to pay down the principal. Toward the end of your repayment term, most of your monthly payment goes to principal and only a small portion is used to pay interest on the debt. When you refinance, you start the amortization process all over again. Make sure you consider the length of time it will take to build equity after the refinance.
  • Does your mortgage have a prepayment penalty? If so, make sure the benefits of refinancing are greater than the penalty amount.
  • What does your credit look like? The interest rate that you qualify for is directly related to your credit score. Before you apply for refinancing, make sure your score is as high as it can possibly be. Go to www.annualcreditreport.com to get a copy of your credit report. Learn how to fix credit report errors and how to improve your credit score. To get your credit score contact the three agencies listed below. Each collects and reports information in slightly different ways, so make sure you check your credit score with all three.

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