Advantages of Refinancing

• If you have a mortgage at an interest rate higher than the current rate, you may consider refinancing to lower your interest over the length of the loan. Make sure that you can qualify for the published interest rate. Analysts often recommend that the new rate be at least 2 percentage points lower than the old rate, but the mortgage refinance calculator available on the Bankrate website gives a true picture because it considers your personal situation. If you can lower your mortgage payments with refinancing, and if the closing costs aren't prohibitive, this can be a wise move. Get an estimate of settlement costs so there are no surprises.
  
  

Disadvantages of Refinancing

• You may be encouraged to add to the mortgage. When you use a mortgage to consolidate debt, you're paying interest over a period of 15 to 30 years for items that will be gone long before the payments. Closing costs may be high, especially if your credit score isn't outstanding. Rolling the refinance expense into the loan increases payments and interest over the life of the loan. Your interest rate may increase before completion if rates go up and you haven't locked in the rate. Refinancing may require monthly private mortgage insurance that you may not have to pay on the old loan if you have paid 20 percent on the principal. If you have a HELOC, or home equity line of credit, on your mortgage, you have to pay this loan before refinancing. Watch for disadvantages and unfavorable calculations and negotiate the terms before you sign.
  
  

Consider Alternatives

• You may save money with a loan modification or adjustment to your current loan. Contact your lender and see if you can pay down your loan and get a better interest rate. Check to see how much you've paid on your mortgage. If you have at least 20 percent paid on the principal, ask to remove the PMI or private mortgage insurance coverage. This insurance is for the lender but you pay for it. You may save up to $100 a month once you reach 20 percent on the principal. Contact your lender. Ask about deals for current customers and inquire about streamlined refinancing. This type of refinance is with the same company as your original mortgage and may save appraisal and other fees.
  
  

Long-Term Effect

• If you add years to a mortgage, you likely increase the cost just as if you add to the principal. A shorter term decreases the cost, so a 15-year mortgage saves you money over a 30-year mortgage at the same interest rate. If you intend to live in the home for years, you can recoup refinance expenses over time. An adjustable-rate mortgage may outgrow your ability to pay, particularly if you reach retirement before the term ends. Consider the long term and your age when refinancing a mortgage.