Refinancing Your Mortgage: What Every Home Owner Should Know

Mary Rand Home Finance Editor

Imagine, you’ve lived in your 3-bedroom, 2-bath for over three years now and you’ve noticed that interest rates have dropped substantially and you’d like to benefit with a cheaper monthly payment. Furthermore, your budget is strapped and you sure could use a little bit of breathing room. Refinancing may be the financial key, but understand a few refinancing fundamentals first and always make an informed and calculated decision.

Refinancing is simply the process of exchanging one loan with a new loan/mortgage. Typically, refinancing is done when interest rates are lower than those of the existing loan, or when other types of loans are more attractive than your existing one. For example, if you’re in an interest-only mortgage, and the cost of the loan is about to skyrocket; you may want to try to get into a 30-year fixed interest-rate loan.

Qualifying for refinancing is a process similar to the one you experienced when you originally purchased your home. You have to have all your ducks in a row with your financial paperwork, and those mortgage people are just waiting to sell you something, so “buyer beware!” Most importantly, understand that there is always a fee for refinancing and you have to be certain that the cost is absolutely worth the financial risk.

When Refinancing May be a Good Idea

My favorite budget-minded rule-of-thumb is that refinancing your mortgage may be a good idea if you intend to live in your home for a while and the outcome is that it reduces your monthly bill $125 to $175. A mortgage refinance must absolutely return the cost and save you money for it to be worth. If you intend to sell your house in the next year or two, refinancing is most likely not a sound financial decision, because the money that your forking over for the fees could easily be used for financing your next home.

Responsible Budgeting Home Owners Don’t Do This!

Don’t make the mistake refinancing for the sake of simply cashing in the equity of your home to buy things! Boats, cars, remodeling projects, vacations, etc. Financial advisors recommend that you never take the equity in your home — your largest and most important financial asset, to pay for something that you don’t have the cash to pay for up front. The same holds for credit card debt, if you don’t change to ill-fated spending habits. Refinancing your home in order to use the equity to pay off high-interest credit card debt can work, but only if you never rack up that debt again.

Words of My Mentor: “Your Home IS…”

My mentor once told me this, and I always tell to my friends and family: “You live in your home. It keeps you warm. It keeps you safe. You build your memories in it. You love in it. You build your financial future on its stability. If you’re a responsible, budget-minded, home owner, you will never use the equity in your home to buy things.”