It is no secret that mortgage interest rates are at historically low levels, leading many homeowners to consider refinancing their mortgage. But it is important to remember that refinancing is not a contest to get the lowest rate. You need to decide if a refinance works fits your personal financial circumstances. Before deciding to refinance, find out the answers to the following four questions.1. Is the equity in your home declining? The foreclosure crisis has flooded the market with unsold and has driven home values down in almost all areas of the country. It is quite possible that even though you want to refinance, a lack of home equity may prevent you from doing so. Before paying several hundred dollars for an appraisal, ask the real estate agent who sold you the house what they it is worth in today’s market. Then your mortgage lender can help you decide whether or not it even makes sense to apply for the refinance.2. How much are the closing costs? When you consider the cost of the appraisal, the new title insurance, and fees to your lender, the cost of your new mortgage may exceed any savings you can expect from the lower interest rate. To determine how many months you would need to stay in your home before you recover your upfront costs, take the monthly savings from your new monthly payment and divide that number into the total closing costs being disclosed by your lender. Is that a realistic time frame for your circumstances?3. What is the new loan term? If you only have 20 years left on your current mortgage and you refinance a new mortgage over 30 years, you have just gone backward 10 years. You may have improved your monthly cash flow, but put your retirement off by another 10 years.4. How certain is your future? Life has become a bit iffy for all sectors of the workforce. Jobs aren’t stable, entire industries have disappeared in the last three years, and unfortunately, the divorce rate remains high. Any of these factors could lead to selling your home sooner than you had anticipated, in which case, the benefits of the refinance have gone down the drain.If refinancing your mortgage does not make sense right now, consider taking the money you would have spent on the refinance and put it against the principal balance of your existing mortgage. Every thousand dollars that you reduce your mortgage balance makes the interest rate less and less of a factor. So stop comparing mortgage interest rates at your neighbors and start focusing on your overall financial health.
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