News Column

Ready . . . Set . . . Refinance!

May 1, 2008

Rick Munarriz

Looking into Refinancing Your Mortgage

Are you itching with refi fever?

It's as natural as it is contagious. Home mortgage rates hit a multiyear low back in February. It didn't help the housing market lift itself out of its slump. There are still way too many homes on the market for that to stabilize. However, for those sitting on relatively high home loan rates -- especially those who bit the hook on adjustable rate mortgages, only to find them reset substantially higher -- mortgage refinancing is a reasonable consideration.

Before we explore the benefits of refinancing your mortgage rate and whether or not it's right for you, let's get the bad news out of the way first. If you bought your home over the past couple of years, there's a fair chance that your home may be worth less than what you paid for it.

That could be a problem. If you owe more on your home than its currently appraised value, you're not going to be able to refinance. In some cases, you may find yourself having to pay payment mortgage insurance -- or PMI -- as a result of having less than 20% based on your home's updated valuation. Yes, even if you had already cleared that hurdle under your original mortgage.

As you can see it, things can get tricky. It also doesn't help that lenders are stingier than they used to be. They are still reeling from the subprime meltdown, so you can be sure that they are going to be very particular about who gets to refinance this time around.

If you have enough equity in your home, based on today's depressed real estate prices, then we can take the refi exploratory process to the next level.

Should you refinance? It's a numbers game, really. You can't just make a decision based on a lower interest rate. Several closing costs and fees are tacked on to the refinancing process. Some mortgage brokers may offer no-cost refinancing--but that only means that the closing costs will be baked into a higher interest rate.

Several Web sites like Bankrate and offer free refi rate calculators online. Punch in the appropriate values like the difference in rates and how long you plan on staying in the home and the software will crunch the numbers for you.

If you have enough equity in your home, you can even do what they call a cash-out refinance, taking out slightly more in principle than you had before. Many people use a cash-out to remodel their homes or pay off higher interest credit cards. Be careful with the latter scenario, because the move makes sense on paper but you're turning unsecured credit card debt into one backed by your home.

This shouldn't scare you away from refinancing. It definitely makes sense for a lot of homeowners. Just make sure that it's possible and that you know what you're getting yourself into.

Go ahead and scratch that refi fever itch. Just don't pick at it until it becomes infected.

Rick Munarriz is a personal finance columnist for He has written for sites such as The Motley Fool and Citysearch and has appeared on NPR, TechTV, Sirius Satellite Radio, and CNN en Espaņol. He can be reached through where he discusses his latest articles.

Source: (c) 2008. All rights reserved.

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