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


Making Your Budget Work

A non-functioning budget is about as useful as a pre-eaten meal. If you are going to have a budget, make it a working one.

Discover More

Safe Deposit Boxes

These classy devices aren't a new invention; in fact, they've been around so long that a lot of people don't know exactly ...

Discover More

Saving for a Goal

For most people, the good life doesn't come all at once. You can save up for it, though. Here's how to do it.

Discover More
More Money Tips

Understanding Closing Costs

Unfortunately there is more to buying a house than just paying the list price. You need to factor in closing costs and ...

Discover More

Lowering Your Mortgage Rate

There are several reasons to lower your mortgage rate. Before signing on the dotted line, be sure that the fees justify ...

Discover More

Reducing Your Mortgage

Reducing your mortgage may seem difficult, but if you know the right ways to go about it, then you can meet with pleasing ...

Discover More

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] (all 7 characters, in the sequence shown) in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is nine minus 5?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)