Refinancing Considerations

(Page 2 of 2 of Refinancing Your Mortgage in Today's Market)

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You may need help to refinance in this difficult market. Congress and the Obama administration have attempted to make it easier for some homeowners to refinance through the "Making Home Affordable" program.

Shopping for a New Mortgage

If you're considering refinancing with a new lender, talk with a mortgage broker about your options. Get all your paperwork in order, such as paystubs, W-2s, and bank statements. If you're worried about your credit score, check it before speaking with a broker. The broker can help you explore your realistic options.

Whether or not you use a mortgage broker, be sure to shop around for the best deal when you refinance. To learn more about shopping for home loans, read Nolo's article Where to Shop for a Home Loan or Mortgage.

To keep track of the information you collect on each refinance option, you might want to use Nolo's eForm: Mortgage Rates and Terms Comparison. This handy worksheet helps you get all the important information, then compare rates and terms for each loan so you can choose the right one for you.

When Paying Closing Costs Makes Sense

If the loan you're thinking of refinancing to comes with a lot of closing costs, double-check whether it's worth it -- in other words, whether the refinance will pay for itself in the reduced interest rate you'll pay. Try Nolo's Refinance Calculator to help you figure it out.

Your calculations will tell you three important things. First, you'll find your new monthly payment amount, which will hopefully be lower. You'll also find your "breakeven point": how long it will take you to work off the initial closing costs by saving on interest each month. If you think you'll stay in your home for less time than it takes to reach your breakeven point, the refinance definitely isn't worth it.

Finally, you'll find out the total interest you'll owe. Starting over with a new mortgage term (most likely 30 years) means adding several months or years to your payment schedule. The more time you take to pay, the more interest you'll owe in total. If your main objective is to lower your monthly payments, you may want to refinance even if it means you'll pay more interest over the long term. If you can later afford to increase your payments, you can refinance again, or simply pay extra to reduce the principal on your current loan.

To Learn More

For easy to read, practical advice on planning your family's finances, see The Busy Family's Guide to Money, by Sandra Block, Kathy Chu and John Waggoner (Nolo).

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