Why Refinance?

Fundamentally, people refinance because they either want to save money or spend money. This article discusses the most common circumstances in which you might save money by refinancing.

One way to save money is to obtain a loan with a shorter life compared to your current loan. For more information, read Switching to a 15 year loan. If you are attempting to save money by reducing your interest rate, read Should I pay points or closing costs? and Switching to a 15 year loan. If you are attempting to save money by consolidating debt, read Cash Out Refinance.

There may be conditions which require you save money in the short-run. An Adjustable Rate Mortgage (ARM) with a low start-rate can temporarily lower your mortgage payments. Depending on the loan, you could substantially reduce your payments for a year or more.

You might believe you'll save money in the long-run by switching from an ARM to a fixed-rate loan--and you could be right. In this case, you're assuming that rates will eventually increase enough to justify the cost of refinancing. There is less certainty of saving money in this scenario because the future is unknown and rate comparisons are hypothetical.

Whatever your reason for refinancing, the process begins by comparing the various loan options you have available, including keeping your current loan. Real estate loans usually have income tax effects. Before rushing into a new loan, consider having your figures checked by your tax advisor. Talk to your current lender. They may reduce some of their fees in an effort to keep your business, or because they may have reduced paperwork.

For each loan you are considering, obtain an amortization schedule and Good Faith Estimate (GFE). A complete amortization schedule will identify the principal and interest portion of your monthly payments over the life of the loan. With it, you can accurately determine the interest paid within any time period. The (GFE) will itemize costs associated with obtaining the loan. The immediate costs of the transaction will be shown on the GFE, while the interest expense over time will appear on the amortization schedule. The information in these documents is required to make an informed decision regarding the best loan for you.