Interest rates are down and have been at historical lows in recent years. So it may be time to ask, should I refinance my home mortgage now?

Many borrowers took advantage of lower interest rates at this time last year when interest rates were averaging just under 5 percent for a 30- year fixed rate loan. Now interest rates are hovering under four percent. Time to refinance? Or, refinance again — if you already took advantage of the 4-5 percent rates previously offered?

There are a number of factors to consider in making the decision to refinance a home mortgage. These include: the extent to which your existing interest rate will be reduced; the costs associated with refinancing your mortgage loan; the amount of the balance on your outstanding loan and its relationship to your home’s appraised value; and how long you intend to remain in your current home.

Be mindful that if you refinance for the same original loan term as your existing mortgage, e.g., 30 years, then you are starting all over again in terms of time and the amortization of your loan. This means that your new payments will start out with a higher interest component then if you were ten years of payments into a thirty year mortgage.

It is important to determine the costs of any refinance. Mortgage closing costs averaged $4,143 in 2011 as reported in the Wall Street Journal on May 5, 2012. To determine your closing costs, add up the costs associated with the refinance such as application fees, points, appraisal fees, other banks fees, title charges, attorney fees, recording fees, etc. Then divide your mortgage closing costs by the amount you expect to save each month with your new loan. This will give you the number of months it will take for you to recoup your costs incurred . If, for example, it takes two years to recoup your closing costs for a refinance, and you intend to move within a year, then refinancing your home would not be cost effective.

It is also important know your equity position before refinancing. Keep in mind that your new lender may require you to have equity in your home of at least 20 percent of the appraised value. If the values of the homes in your area have fallen significantly, and you have a high balance on your mortgage, this could cause the lender to approve a lower mortgage amount than what is needed to pay off your existing mortgage. This could mean that in order to refinance, you may need to contribute additional funds from savings to assist in paying off your existing mortgage.

For those homeowners who are "underwater", meaning the value of their home is less than the balance due on their mortgage, refinancing is generally not a viable option unless they can pay down a sufficient portion of their existing mortgage from other funds to satisfy the equity requirements of a new lender or, qualify for a governmental assistance program addressing this issue.

Thus, refinancing must be considered thoroughly to determine if it is an available option, and if it is your best option. If it is a good option for you, it can certainly help to reduce costs during these difficult economic times.

Barbara Strapp Nelson is a Shareholder in Stark & Stark’s Residential Real Estate Group. For questions, or additional information, please contact Ms. Nelson at bnelson@stark-stark.com.

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