Mortgage Refinance Basics

By: Jeff Tompkins

As rates continue to go the way of gas prices, which is to say much higher than they really need to be, the question inevitably comes up... "when is a good time for me to refinance my home?" Let's look at a few key things to keep in mind when considering a refinance.

1. Are the interest rates currently offered higher than what I have already?

Refinancing has slowed over the last year for the simple reason that most people took advantage of the low rates and refinanced a few years ago, so today's rates are not as attractive. If you can get a lower rate than what you currently have, then it might make sense to refinance, but the rate should be at least 3/8 lower than what you have now to make much of a difference. For example, on a $200,000 loan amount, a 6% rate is a principal and interest payment of about $1199 a month. If you drop that rate 3/8 to 5.625%, the monthly payment drops to $1151 a month. Not a huge savings ($48) when you consider closing costs you will have to pay simply to do the loan (probably around $4000).

2. Am I currently in a loan that will be adjusting soon, making my payment and rate higher?

During the refinance boom of the last few years, a lot of people chose adjustable rate mortgages (ARM's) to take advantage of the lower rates. These ARM's however can adjust at some point during the life of the loan, meaning the rate and the payment can go up. If you anticipate this rate/payment going higher than what is currently offered on the market, you might consider refinancing that loan. This is particularly true with home equity lines of credit (HELOC's) that are based on the prime rate. As the Federal Reserve Board continues to raise rates (currently at 7.75%), the rates and payments for the HELOC's will go up as well. It might be time to put a cap on it by refinancing to a fixed second mortgage.

3. Is my home's equity available at a cheaper rate than I am paying on other debts?

Many people refinance to take the equity out of their homes in the form of cash, to use for a myriad of reasons including paying off other debts, paying for college, making home improvements or additions, etc. When does this make sense? Let's say you can get a home loan for 6% using some of your home's equity. And you have credit card debt, accruing interest at between 18-24%. Wouldn't it make sense to pay that credit card debt off with a 6% loan, saving you about 12-18% on interest every month? Of course it would.

When considering a refinance, make sure it makes sense in the long run, counting all the costs of the new loan and how much it would actually save or help you. You can always get an impartial third party opinion; maybe ask a trusted CPA or financial planner before you ask your mortgage broker. And finally, get all the facts from your mortgage broker (and find a trustworthy one who is concerned about your financial well-being more than his/her own profit) to make sure the refinance will meet your needs.

Jeff Tompkins is owner and president of Teacher's Funding Group, LLC, a Colorado mortgage broker that specializes in providing home financing to those in the education industry and all those who need it. Feel free to email Jeff at if you have any mortgage/financing questions. Visit for more information.

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