I know most of the people with mortgage are confused and are stuck with the question “When should I consider refinancing my mortgage?” Today, prevailing interest rates are much lower than the time we purchased the house. And we can easily refinance through the existing lender without any closing costs.

If you have, however, decided to refinance your mortgage, I would recommend you to pay attention to few factors mentioned below.

Interest Rates

Ask your self, what is the interest rate you are paying now? What would it change to, if you consider refinancing it? Is the difference quite considerable? Is the interest rate expected to rise in near future? However, it should be noted that even 1% of change in rate can affect your payment quite radically.

Type of Loan

One of the factors that have the power to influence your decision to refinance your mortgage is the type of your loan. Are you planning to switch from an adjustable rate mortgage (ARM) to a fixed one? Are you planning to switch from a short-term loan to a long-term, or a long-term to a short-term?

Closing cost

It’s important to consider the amount you will need to refinance your loan. In short, before refinancing, learn how much cost would be incurred and arrange for this amount. Also, many financial institutions are open to negotiations; check if you can reduce this cost. Many times, you can pay this cost by opting for higher interest rate or by including this amount in the new credit balance.

Credit Rating

If you have a good credit score, or recently it has improved, chances are you might be offered a good deal, lower interest rate that is.

Your Budget

Refinancing can help you to save a bit every month, if you opt for a long-term plan. However, a short-term loan means paying more amounts every month (obviously lower interest rate). So, saving is quite difficult. Hence, it is important to consider or redesign your budget before you go for refinancing.

Calculation

It is also important to calculate the new loan payment. You can find several calculators on the web. But, my suggestion is go for the one provided by Bankrate.com. You will need to feed in the following things:

• Existing Loan Amount:
  This is the total amount that your borrowed to purchase your home.
• Existing Interest rate:
  The interest rate that you’re paying now.
• Tenure:
  The total number of years your mortgage is for.
• Existing balance:
  How much you still owe on the mortgage?
• New Interest rate:
  This is the interest rate you are planning to switch to, that is refinance rate.
• New Tenure:
  What would be your refinance tenure?
• Pre-Payment Penalty:
  Many creditors charge you a pre-payment penalty. This means, they charge you a fee if you repay the loan amount a bit early. Quite strange but it’s implemented. Hence, it’s better to check with your lender.
• Closing costs:
  This includes appraisal fee, taxes, survey, credit report charges, loan origination fees, insurance, title search, and other charges. These tiny costs usually sum up to 2-6% of the total new mortgage amount.
• Points:
  This is the extra amount you pay, if any, to avail better rates.

Do not take your decision just because your relative or your neighbor suggested you. Find out more about refinancing.