Q&A: Any Cons to Refinancing Now?

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Q: With mortgage rates this low, we can’t resist refinancing our mortgage. We’ve never done it before and would appreciate a few pointers. Can you help? – A. Moran, Framingham, Mass.

A: You’re right about the low rates, and likely right about refinancing. According to the BankingMyWay Mortgage Rate Tracker, the interest on a 30-year fixed-rate loan is a low 4.588%.

If you have good credit - anything above 700 is a big step in the right direction – you can probably get the low rate.

That said, the question of whether you should refinance must be addressed. By and large, if you can knock one full percentage point off your mortgage by refinancing, you’ll likely come out ahead. So if your mortgage rate is currently 6% and you can get a new mortgage loan with an interest rate of 5%, then you owe it to yourself to at least to start looking around.

Take a standard $200,000 30-year fixed-rate mortgage loan. If you slide down from a 6% mortgage rate to a 5% rate, you can save $3,552 during the life of the loan, according to the BankingMyWay Refinancing Calculator.

There are some hurdles to clear before you sign any mortgage papers.

First, you want to aim for a refinancing deal with limited closing costs – less than $1,000 is ideal.

Deals like that aren’t easy to find, but they are out there. Start with your original lender. You already have a relationship with the bank, and banks are more amenable to cutting costs (and deals) with existing customers.

Your bank may opt to give you a choice: A lower interest rate with higher closing costs, or a slightly higher rate with low or no closing costs. There’s also less paperwork when you work with your original lender, and you might even save on an appraisal (the bank already has one on record).

Two final points. You may want to put your refinancing deal on hold if you have lived in your home long enough that most of your mortgage payment goes toward the loan’s principal rather than interest. If you refinance now, you’re going to re-extend the length of your loan. That’s not a great idea when you’re already cutting into your loan’s principal amount.

Also, if you have a big line of credit or home equity loan outstanding, you may not have the equity necessary to make a refinance deal worthwhile. Most lenders want at least 20% equity on a no-cash refi deal – or more if you’re going to qualify for the best loan rates and terms.

Refinancing is a big decision, so take some time to figure things out. But don’t take too much time – these low rates may not be around for long.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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