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7 questions to ask before you refinance Indecision can cost you opportunity. Here's how to properly weigh the risks and costs of a new home mortgage. By Kathy Kristof Indecision may have cost Brian Hummel several hundred dollars a month.
When interest rates hit 30-year lows, the Los Angeles lawyer was ready to refinance his mortgage, but he lamented a few hours too long about some of the details. Meanwhile, rates popped back up, making the refinance less viable. In today's bumpy interest-rate environment, homeowners may want to take heed. Mortgage rates sometimes change in the blink of an eye. Making decisions in advance about whether, when and how to refinance a mortgage can allow you to move quickly when market rates are in your favor. That can spell significant savings. How do you decide whether refinancing make sense? Answer these questions and see. How much would you save on monthly payments? Consumers save about $30 for each half-percentage-point drop in interest rates on a $100,000 loan. The savings would be twice as much for a $200,000 loan -- or if the percentage drop were 1% instead of 0.5%. You can use this as a gauge to estimate the savings for your loan. If you want a more accurate estimate, use the Web-based calculators at Bankrate.com. What are the upfront costs? Upfront costs on a mortgage loan generally range from 1% to 2% of the loan amount, but they can be significantly higher or lower. These fees range from "points"-- prepaid interest -- to fees for title insurance, appraisals and document preparation. The Real Estate Settlement Procedures Act requires lenders to provide a good-faith estimate of these fees to consumers within three days of applying for a loan. If the actual fees are significantly higher than the good-faith estimate, consumers have the right to cancel the deal. How long would it take to recoup the upfront costs through the monthly savings? Divide the upfront costs of the loan by your monthly savings. The result is how many months it will take to recoup the refinancing costs. How long will you remain in the home? If you plan to live in the home well past the point that the refinancing costs will be paid through monthly savings, refinancing makes sense. Can you get better loan terms? If you had a low down payment or bad credit when you first bought your home, you're likely to be paying private mortgage insurance -- costly coverage that protects your lender, not you. If your credit has since improved or you've paid enough principal to boost your loan-to-value ratio, refinancing may allow you to drop the PMI. That could make refinancing a good deal regardless of whether or not you were able to cut the rate. Do you have other needs for cash? Federal income tax laws allow homeowners to borrow up to $100,000 on their homes to pay other expenses -- anything from buying a car to paying for a child's college bills. The benefit of borrowing against the house to pay these costs is twofold: Mortgage loan rates are generally lower than the cost of car loans, for instance. The interest on mortgage loans is also tax-deductible, making the after-tax cost even less. The detriment is that you could lose your house if you're unable to make the monthly payments. That said, if you have need for additional cash, refinancing can provide the means to get it. Generally, however, you'll pay slightly more for the loan if you're boosting the new loan amount above the amount of the existing mortgage. Are you willing to take a chance? Even if fixed-rate loans aren't low enough to warrant refinancing, some borrowers might consider certain types of adjustable-rate mortgages (ARMs). So-called 5/1 ARMs offer fixed rates for five years. After that, the loan rate adjusts once a year. The benefit of these loans? They cost about 1 percentage point less than 30-year fixed-rate loans, making them ideal for people who plan to trade up, move or refinance before that point. People who are in starter homes and those who get transferred frequently would be wise to consider this type of loan, said Steven Filsinger, president of Asset Alliance Mortgage in Carlsbad, Calif. By accepting some interest-rate risk, these consumers can save a bundle. 
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