If you’re thinking about refinancing your mortgage loan, there are a few factors you should consider, such as how much longer you plan on staying in your house, whether interest rates are rising and what other debts you currently carry.

Re-financing to lower payments

You can lower your monthly payments either by obtaining a lower interest rate or by shortening the term of the loan. How much longer you plan on staying in your house will determine what rate is beneficial for you.

A good rule of thumb is to calculate the total cost of the refinancing (with closing costs and other fees) and then estimate what your monthly savings will be with the new interest rate. You then divide the cost of refinancing by the monthly savings to determine how much longer you should stay in your house to make the refinancing pay off. For example, if it will cost $2,000 to refinance your mortgage, but your new interest rate will save you $100 month – 2000/100 = 20 months that you should plan on staying in your house.

If you are shortening the term of your loan, such as from a 30-year to a 15-year mortgage, compare the amortizations (which you should get from your lender) to determine how much you are saving in interest.

Re-financing to convert to a fixed loan rate

If you’re planning on converting your adjustable rate mortgage (ARM) to a fixed rate loan, the same rule of thumb can apply. How much will it cost you to refinance, and what will your monthly savings be? And does it look like interest rates are going up or down? If they’re going down, it might be better to wait to refinance so you can lock in at a lower rate. Or if your ARM converts to a fixed rate after a certain number of years, how much longer did you plan to stay in your house? Using the "general rule of thumb" will the refinancing pay off by then? Taking a hard look at all the factors involved will ensure that your refinancing will save you money.

Re-financing before a balloon payment

A "balloon payment" loan is one where you pay lower payments for a fixed amount of time, then owe a large payment or balloon payment at the end of the term.

Refinancing to a fixed or adjustable rate loan may make the monthly payments higher, but you also avoid the large outlay of cash needed for a balloon payment.

Make sure you refinance a few months before your balloon payment is due to ensure that any delays in the processing will be complete before the balloon due payment date.

Re-financing to consolidate debt

Some people also refinance to help them pay off or consolidate debt or to fund educational expenses. In many cases the interest rate on your home loan is lower than credit card or personal loan rates, and by consolidating all your debt into one loan, you have the convenience of making one payment for all of your outstanding loans. In addition, the interest on a home loan is many times tax deductible. (You should check with your tax advisor for more details on this option.)

Re-financing to fund home improvements

Home improvement costs can add up pretty quickly, and a home equity loan/line of credit can help fund those projects at a rate typically lower than a bank loan. In addition, many times your loan interest may be tax deductible. Check with your tax advisor for more details.

No Cost Home Equity Line of Credit