Reasons to Refinance

Your home or condo, provided you own it, is probably the biggest source of equity in your personal finance portfolio aside from stocks or investments. With the cost of so many basic life necessities going up such as fuel, food and health care, it may be tempting to refinance to lower your monthly payments in order to free up some cash to cover other monthly expenses. Or you might be considering refinancing to tap into some of the equity you have built up over the years to help pay off other debt. But in doing so, you will basically be diminishing the resale value of your home.

Of course there may be instances in life where it becomes necessary to refinance or cash in equity in your home, and in those cases then you simply need to do what is best for your individual situation. Always shop around for the best interest rates possible and don't rush into a contract because you think you'll free up some cash quickly. Lowering your monthly payments only to face a large balloon payment later on may seem like a good deal right now. But while that balloon payment may look smaller from the distance of a few months or even years, it could seem like a mountain when faced up close when it comes due.

The same basic rules of thumb apply no matter what your reasons though, and a few common scenarios for refinancing are covered in the following paragraphs.

The most logical and common reason to refinance your home is for a better interest rate on the loan. Most experts will tell you that you won't save money unless the new rate is at least two percent lower than your current interest rate. That magic number is the lowers one that will generally let you recoup fees incurred during the refinancing process and let you break even again in a couple of years for most loans so that you can then start to reap the interest savings.

If you've recently bought a new condo that came with a pre-construction discounted price or bought a unit in a building that has the potential to increase in value, such as the much publicized http://www.bestchicagocondos.com/pre-construction-condos/chicago-spire.html then you also may be able to negotiate for a better mortgage rate with a different lender.

If you currently have an adjustable rate loan or mortgage and are concerned that your rates will increase beyond your ability to pay, then you may want to shop around for a fixed rate even if that may be a point above what you are paying now. Paying slightly more over time may not be a savings, but it could save your home or lifestyle if your monthly payments increase to the point that you end up in default on your loan and lose your home to foreclosure.

Another reason some people chose to refinance is to shorten the loan time frame in order to pay it off more quickly and build equity faster. But besides the obvious desire to lower your interest rates, you also need to be certain you'll be able to handle the increased monthly payment amount that will come with a shorter time frame.

There are also some home owners who decide to go with the balloon payment mortgage just to make the most of the lower monthly payments and gamble on being able to refinance before the lump sum balloon payment comes due. This type of mortgage flipping isn't recommended, but for some it can be worth the risk and allow time to use the money saved from lower monthly payments to be invested in other areas.

Something else you should consider before refinancing is how long you plan to stay in your home. If you are planning on living there for at least five more years, then it may be worth while to shop around for a better loan rate. But if you think there is a chance you might sell you condo or home within five years, then it probably isn't worth the added cost of refinancing fees or closing costs. And be sure to check with your current mortgage or loan holder to see if there is an early repayment fee. Sometimes you can even negotiate a better rate with your current mortgage holder and most likely make the process much simpler than if you started from scratch with a new lender.

All in all, the most sound advice anyone can give you about refinancing is to take your time and try to find the best rate possible for the loan. Don't forget to ask about closing costs, title insurance, fixed rate versus adjustable rate, prepayment fees or any other fees over the life of the loan. Truly, the only ignorant question is the one you didn't ask before signing the contract.