In a way, "refinancing" is a misleading term, because it suggests to many home
owners a process of changing or altering their mortgage. In fact, refinancing is
simply the process of taking out a new mortgage, and using the money obtained to
pay off your current mortgage.
That means refinancing involves many of the same steps that were involved in applying for and getting your mortgage
in the first place and can also involve some of the same expenses. On the other hand, depending on how the terms of
mortgages that are available now compare with the terms of your current mortgage, refinancing can save you a sig-
nificant amount of money. Refinancing is most likely to make sense for you if your current mortgage has an interest
rate that is higher than current interest rates.
If you refinance with a lower interest rate, you'll pay less each month - even if your new mortgage is for the same
amount as your current mortgage. Of course, the process of getting a mortgage involves costs of its own. Traditionally,
the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the
costs of refinancing. But in recent years, lenders have introduced "no cost" and "low cost" refinancing packages that
minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate
with a higher interest rate, or by including some of the costs in the amount that is refinanced.)
With traditional refinancing, the most often cited rule-of-thumb is that the interest rate for your new mortgage must
be about 2 percentage points below the rate of your current mortgage for refinancing to make financial sense.
However, with the newer low and no cost refinancing programs, it can be worth your while to refinance to obtain a
much smaller reduction in interest rates (even as low as 3/4%).
How long you expect to stay in your home is also a factor to consider. If you'll be moving in a few years, the month-
to-month savings may never add up to the costs that