Focus on finance: Refinancing your mortgage.

Question: Mortgage rates still are relatively low. Is now a good time to refinance my home loan?

Answer: Currently, average mortgage rates nationally are remaining near historic lows. In fact, mortgage shoppers are enjoying exceedingly low rates compared to what homebuyers faced just a few years ago.

At this writing, the national average for a 30-year fixed rate mortgage is hovering around 4 percent annual percentage rate or APR. By comparison, the national average almost was double that, or about 7.15 percent APR in 2001, according to HSH Associates, publishers of Financial Mortgage Rate Survey.

Of course, the mortgage in­terest rate any borrower qualifies for will depends on that individual’s credit worthiness, value of the property to be financed, the loan terms, the lender and other factors.

If you’re considering refinancing your current mortgage, one commonly used rule of thumb is to determine if you can reduce the APR by a percentage point. If so, it may be worth refinancing in terms of lower monthly payments, shorter term or less in overall interest paid.

You also should consider the expenses of refinancing into your cost-saving analysis. Consider any out of pocket fees, such as appraisals, closing costs, pre-paid interest, etc. These closing costs could equal about two percent of your new loan amount. When calculating if refinancing is advantageous, you might consider any savings versus costs of refinancing factored against how long you plan on staying in your home.

One way to decide whether refinancing makes sense is to divide your costs by your monthly savings to figure out how soon you’ll recoup the expense. For example, if you paid $2,500 to refinance and saved $150 each month, it would take you about 16 months (2,500 divided by 150) to recoup your costs. This calculation is known as a break-even analysis.

Of course reducing or eliminating refinancing costs could make your decision easier. Some lenders offer low or no closing costs for refinances while others waive normal fees during special promotions.

Another possible benefit to refinancing your current mortgage is receiving cash for part or all of the equity you may have. The difference between your home’s current value and the amount owed on a mortgage is known as equity. Borrowing against that equity or receiving a lump sum when refinancing, is known as a cash-out refi. The advantages are that you’ll be able to spend the cash however you want and you’ll typically pay a lower interest rate than you would for a credit card or other type of loan. As with your original mortgage, the house is the collateral for the loan and could be claimed by the lender in case of a loan default.

In the current low rate market, refinancing your mortgage could not only save you money on monthly payments and the total amount of interest you pay, you could opt for additional cash to pay off other bills or for other purchases. Of course, you should analyze the pros and cons for your particular situation, but now could be a good time to refinance.

Source: Focus on finance: Refinancing your mortgage | TheNewsEnterprise.com