Should You Refinance?

by Matthew Perry
(last updated February 21, 2009)

Refinancing—replacing an old loan with a new one—is a big decision and a useful option to have, but it may not be right for you. If you don't meet certain criteria, you may be better off with the loan you have. With the internet, finding a calculator for your specific situation is fairly easy, but read on before beginning your search and I'll explain some of the details that calculators may not account for.

First of all, the market interest rates shift with time and the economy. You may want to refinance if the lowest interest rate on the market—or the lowest rate you can get, which isn't always the rate advertised—is lower than the rate of your original loan by at least two percentage points.

Why two points? Good question. The truth is that refinancing can cost hundreds or even thousands of dollars through fees and charges since you're virtually getting a new loan when you refinance. With two percentage points of savings on your interest, you'll save enough money to offset the costs of refinancing.

Another reason to refinance, even if the current rate isn't quite as low as you would like, is to cash in on the equity you've built in your home. While it's foolish to cash in on equity without a purpose (you might think of it as regressing on your loan or going back into debt), spending money may help you to save money if you have a lot of debt in other places and at higher interest rates. By paying off those debts with equity money, you can put all of your debt in one place (your mortgage) and at one rate (the lowest), so you'll have fewer creditors to worry about at once and less money lost to interest payments.

If it looks like the time is right to refinance, don't wait to do your homework! Get detailed offers from your loan provider right away.

Author Bio

Matthew Perry

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