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When to Refinance Your Home Mortgage

© Kirk Lindstrom

In the "old days" lenders used to have very high closing costs so you would only refinance your home loan if the rate went down 2% or so. This would give you a payback of closing costs in about two years for typical loans. Today, many new programs make refinancing your home loan a wise move even if rates are flat. This article will examine refinancing your home.

Definitions

A home refinance is where you replace a current home mortgage with a new loan.

PMI is Private Mortgage Insurance that protects the lender against the loss of its investment in your home.

Home equity is the amount of money you would get after selling your home and paying off the lender but before paying selling fees.

Nonrecurring closing costs are costs to close a loan that only happen once. These may include points, the appraisal, documentation fees, etc.

Why Refinance?

There are many reasons to refinance. The most common reason to refinance is to lower your payments when interest rates fall. The rule of thumb is you should refinance any time your savings will pay back the closing costs over a period of time shorter than how long you plan to own your home.

Another reason to refinance is to eliminate costly PMI. If you paid less than 20% for a down payment, then lenders usually require PMI. I've seen PMI as high as 0.6% of the loan amount so a $250,000 loan would have you paying $1,500 a year just for insurance! When your house appreciates so you have 20% equity, then you should refinance and eliminate this PMI payment. It might even make sense to use any cash windfalls to "buy down" your mortgage with a refinance to an 80% loan and eliminate this very costly insurance that is unnecessary once you have 80% equity in your home.

Many people refinance their homes to take money out to remodel or do major home repairs. This often makes sense when you have many years of appreciation and any money taken out would still have you with greater than 20% home equity. I DO NOT recommend people take money out of their homes to buy autos or other items that don't last as long as a home.

Some people discover they have had several raises since their first mortgage and they can afford to pay more every month. If you are in this lucky group, then you can refinance a 30 year loan to a 15 year loan and get a better rate while saving thousands and thousands of dollars on interest.

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