Evaluate Your Existing Mortgage

When you're considering to refinance, you need to look beyond what your interest rate will be versus the interest rate you currently have. This is because many costs are involved when you refinance. In fact, you will find that refinancing costs nearly as much as your original loan. These fees include an appraisal, application fee, loan origination fee, title insurance fees, attorney's fees, closing costs, and more. In addition, you may have an additional fee for paying your original loan off early. To obtain a lower interest rate, you may be required to pay points. Points are a cost you pay to the lender to buy a lower interest rate.

First, you need to consider how long you plan on living in your current home. Obviously, the longer you own the home, the more money you'll stand to save through refinancing. You should calculate a break even point. This is the point at which the money you saved through monthly payments equals the total expenses your incurred when you paid all the fees associated with the refinance. It is best to do this calculation based on the number of months. For example, if it takes 50 months to breakeven, refinancing may not be worth it. This is especially true if you don't expect to own the home in 5 years.

Also, you must understand that if you switch from a fixed interest rate loan to an adjustable rate, you are taking a big risk. Fluctuations in interest rates are inevitable and are impossible to predict over very long periods. Even if you believe that rates will drop, you need to remember that the duration of most home loans are 30 years. With such a long time horizon, there's simply so many things that can go wrong and lead to high inflation. A fixed interest rate may be more expensive in the short run. However, you will always know how much you will have to pay.