Refinancing Your Home Mortgage: A Smart Choice?

Now, when mortgage rates are at record lows, refinancing gives hope of lower monthly payments. But, its a different scenario from years ago, when you received cash back.  Instead, you may have to pay cash upfront when you refinance if your loan-to-value ratio is greater than 80%- most lenders will require you to pay private mortgage insurance.

Before you sign a contract to refinance, sit down with a calculator to determine whether the savings from a cash-in refinancing are worth the cost. The most important issues:

•How long you plan to be in your home. With a conventional refinancing, you will generally cover your costs in a few months.  But with cash-in refinancing, it could take much longer. You should be looking at spending the next 5 years in your home to reap the rewards of refinancing.

•Where you'll get the money. If you have money in a bank account earning 1% or less, you could earn a better return by buying down your mortgage rate. But the ability to pay down your mortgage is key. You shouldn't spend your entire savings to lower your mortgage principal.

Remember, refinancing to buy down your mortgage comes with potential risks.  If the value of your home declines and you have to sell, you could lose the full amount you spent to buy down your mortgage.