Overall, the question of whether to refinance or hold onto the mortgage you have is something best answered on a case-by-case basis. There are no universally applicable rules, despite what some will tell you. For instance, it doesn't 'only make sense to refinance' if rates drop by half of a percentage point or more. What if you don't have to spend any closing costs to drop a quarter of a percentage point on the same kind of loan program you have now? Is saving money ever not worth it?
Depending on your motives, refinancing can be a smart move in a variety of circumstances. The two main motives for refinancing are to lower your monthly mortgage payment or to take cash out for a variety of purposes.
If you are looking to refinance to save money on your monthly payment, get quotes from a few loan officers and see what you'll save. Make sure to read my article on comparing loan offers entitled The Best Way to Compare Mortgage Quotes, and use the attached chart to see who is truly being the most competitive.
When calculating your monthly payment savings, make sure to take your closing costs into consideration (if there are any! - read the article entitled Closing Costs, Or No Closing Costs? for more details). If you will save $100 per month on your payment, but spend $3,000 on your closing, you would have to remain in your property for 2 1/2 years before coming out ahead. If you know you'll move or sell before then, it would be best to stick with what you've got.
If you want to take cash out of your property with a refinance, it pays to take a good look at what you could do with the money. In a lot of cases, you can pay down higher interest rate debt to lower your total monthly expenses overall. I would be careful here though - there are plenty of mortgage companies out there that exist solely to do 'debt consolidation' loans. Their business thrives on certain myths and over-generalizations.
For example, just because you have a balance on your car loan of $6,000 at an interest rate of, say 9%, and you could throw that into your new refinance mortgage at 7% does not mean that it will save you money. Perhaps your total monthly expenses will decrease, but if you plan on staying in your house for a long period of time, you may end up paying far more for that car than you would have otherwise. The difference is that normally you pay off a car loan within 3 to 5 years. When you throw that balance into the mortgage, you pay a lower interest rate over a much longer period off time!
Over the life of a 5-year $6,000 car loan at 9%, you will pay a total of $7,473. That same $6,000 added onto a $100,000 mortgage at 7% will end up costing $14,371 over 30 years. Obviously, if lowering your total monthly bills is what appeals to you more, it may be a fine idea - I just don't want to make it look more advantageous than it truly is. In this case, throwing the car loan into the mortgage would save you about $84 per month.
Your loan officer should be willing to calculate the various advantages and disadvantages for you. If she makes cash-out refinancing look too good to be true, make sure to ask someone for a second opinion.
If you need to take cash out for other purposes, just make sure using the mortgage to do it would be the most cost-effective way. I've heard of people financing college expenses with a mortgage - I think this is in most cases crazy! Student loans are typically at much better interest rates and have much more flexible repayment plans than mortgages. However, I have had customers finance home improvements with a new mortgage - in this case, people can come out ahead as long as they don’t overextend themselves.
Overall, I advise my customers not to give up all their equity to a new loan if at all possible. If you have to sell your house unexpectedly, you don't want to be in a position where you can't pay off your mortgage with the sale!
A refinance should be considered very carefully - for help with your scenario, contact me anytime. Also, give me a call or send me an email if you'd like to be added to my rate watch list. For people looking into a potential refinance down the road, it pays to stay up to date.
