The Real Deal on the “R” Word: Refinancing

Refinancing is just a fancy word for negotiating a lower rate on your mortgage. The idea is to go to your bank and figure out a good give-and-take to make your mortgage repayment plan advantageous for you and for them. You might consider refinancing your mortgage if interest rates drop significantly below what you’re currently paying. It’s the same kind of feeling you get when you just bought something at full price and then the item goes on sale.

If you’ve got good credit and make your mortgage payments on time, you should be able to lock in a lower rate for the rest of your mortgage duration. Ideally, going through a good refinancing—or “refi ” for short— will reduce your monthly payments and possibly save you money if you do it at the right time. However, keep these two things in mind:

1. It can be as big a pain in the butt paperwork-wise as getting the mortgage in the first place.
2. There may also be substantial closing costs, just as there were when you first got the mortgage. Be sure to ask about all the costs involved, because it may turn out that the money you save by getting a lower interest rate will be reduced, or even wiped out, by those costs. For example, if you reduce your monthly payments by $100, but closing costs are $3,000, it’s going to take thirty months to break even. Only then will you start saving money. So you want to be sure the interest you’re saving is enough to make the refi money you are spending worthwhile.

And although it might seem counterproductive, in some cases it may still be worth refinancing even if your monthly payment goes up, if you are cutting down your total payoff period.