Refinancing Your Home - Should You Do It?

A mortgage payment is normally the largest household payment, and interest rate contributes greatly to that. But interestingly enough a study conducted by Bankrate found that nearly 27% of Americans do not know their interest rate.

So how do you know if refinancing your current mortgage is right for you? First things first, if you don't know your interest rate - figure that out by asking your lender, and then consider the reasons below.

Refinancing your mortgage to establish a lower interest rate is one of the many reasons to do a "refi". It's thought to be a good idea if you are able to reduce your current rate by at least 2%. The decrease in your interest rate can lower the overall interest paid during the life of the loan. Just be sure that the cost-benefit analysis makes sense when considering any fees or costs involved.

Many individuals refinance because they want a lower monthly payment. This can be achieved by lowering the interest rate and also by extending the life of the loan, for example, changing from a 15-year term to a 30-year term. Yes, this may lower your monthly payment, but keep in mind this can result in paying more towards interest.

On the other hand, some people refinance because they want to shorten the life of their mortgage. If they secure a lower interest rate than their current loan, they can ultimately have the same monthly payment, but pay it off in 15-years instead of 30-years, and save a good amount in interest payments.

An adjustable-rate mortgage typically begins with a lower interest rate than a fixed-rate mortgage, but comes with periodic rate adjustments that can increase the interest rate. ARM's are great in a decreasing rate environment, or if you don't plan to live in the home for a full 30-year term. If you are concerned about the rate adjustment it may be smart to consider a fixed-rate mortgage. Many times consumers will refi from an adjustable mortgage to a fixed-rate mortgage near the end of their lock rate or in an increasing rate environment to lock in a lower rate. Either way it is important to understand the risk of both types of mortgages and how your monthly payment could fluctuate.

It's always important to do your research when it comes to making a big decision such as this. Keep in mind that it normally costs between 2-5% of the principal of your original loan to refinance, which requires an appraisal, title search, and application fees. So make sure your rate of return will cover this.

As always, it is important to consult a financial advisor that can assist in determining what options are best for your personal situation.