Here are the basics:
Pros of Refinancing your Mortgage:
1. Lower your monthly payment
2. Can shorten the length of your mortgage (changing from a 30 year loan to a 15 year loan)
Cons of Refinancing your Mortgage:
1. You return to the BEGINNING of your mortgage cycle -- meaning that your are at Payment #1 again.
2. Because you are on Payment #1 again, the portion of your monthly payment that goes toward paying the principle goes back to its smallest amount and your payment portion for interest goes back to its largest amount.
3. The lender charges closing costs for lowering your interest rate. You didn't think the bank was going to give you 10's of thousands of dollars for FREE, did you? Expect to pay at least $2,000 in closing costs. Obviously the more money you're borrowing, the higher your closing costs will be.
4. There are many other fees (beyond closing costs) associated with refinancing. To some degree, it is like you are buying your house all over again. Remember how fun that was?? Taxes, insurance, and prorated insurance will most likely be due also.
Good AdviceMost experts agree that you need to be able to reduce your loan interest rate by at least 2.0% to make it worth all the fees you will be charged.
Don't refinance if you're selling the house soon. Go to Bankrate refinancing calculator and see how much your monthly payment will be with your new loan. Subtract that from your current monthly payment and see HOW MANY months it will take you to save the money you will have spent on closing costs, fees and taxes from your refinance. Will you own your house long enough to make up this $ difference?
Be careful with ARMs (Adjustable Rate Mortgages) right now. Home loan interest rates are currently so low, that the chances that your mortgage payment will adjust up in a year or two are very good. With the economy where it is, this could be dangerous for your financial future.
If you do refinance, go for a shorter length mortgage: 15 year instead of 30. You will save 10's of thousands of dollars over the life of your loan with just this one change.
Noodling Over a Mortgage Refinance
When is it Right to Refinance Your Mortgage?