- Are you lowering your monthly payment, even after factoring in the costs of refinancing?
- Will you be able to pay off the debt sooner?
- Are you freeing up money to pay off other debts?
- How long do you plan to own the property? (The longer you plan to own, the more sense it makes to refinance.)
- Will the cost of the loan overall be lower?
- Make sure that you either work through these analyses yourself or seek the advice of your financial advisor.
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Is it better to pay down a mortgage or to invest those extra funds instead? It depends.
- What is your tax bracket? (See the Marginal Tax Bracket Table in the Reducing Taxes section.) That 7% mortgage rate may only be costing you 4.6% after taxes.
- How much time should the money be invested? A long-term return of 7%-8% on a diversified portfolio is better than paying off a 6.5% mortgage.
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E-mailTake the time to shop for loan rates for any major purchase, but especially to purchase a home. Be sure to check into any mortgage programs you may qualify for, such as first-time homebuyer programs, etc. See Mortgage Loan Calculator.
Should You Refinance?
When interest rates decline, mortgage refinancing becomes popular. By refinancing, you can reduce your monthly payment, thereby freeing up monthly income that you can put to better use by investing for your retirement or paying off other debts.
However, it does not always make sense to refinance. If you are already seven to eight years into your 30-year mortgage, you have already paid a lot of interest. So make sure that the new rate is low enough that your overall interest cost will be lowered. Even though you may reduce your monthly payment, it may make more sense to refinance with a 15-year mortgage, rather than incurring additional interest with a longer term. Also, do not forget to factor in the fees and any points you may have to pay. In other words, do not assume that just because interest rates have declined that it is in your best financial interest to refinance. Research!