On the day of this writing, mortgage interest rates are the lowest we have seen in the past 40-years. The low interest rate environment over the last couple of years has sparked a refinance boom. Millions of people are refinancing their mortgage in an attempt to take advantage of the lower rates. Perhaps you have been considering refinancing your mortgage and wondered is now a good time. It certainly makes economic sense to pay the least amount of interest on any outstanding loan. However, there are certain things to weigh before refinancing your mortgage--such as closing costs, term on existing mortgage, time horizon in the home, prepayment penalty, equity position, etc. Does this refinance coincide with your short- and long-term goals?

Refinancing is the process of paying off one loan with the proceeds from a new loan, using the same property as collateral. People refinance their mortgage for different reasons. Below are various reasons people refinance their mortgage.

Rate and/or Term refinance: Everyone could stand to save money. A reduction in interest rate and/or reduction in term can save you thousands of dollars in interest expenses over the life of the loan. A reduced interest rate will allow more of your mortgage payment to be applied to principal, saving you money on interest. When you reduce the term on your mortgage, you shorten the time you will have to make payments. For example, going from a 30-year mortgage to a 15-year mortgage. A reduced term will save both time and money and free up your money sooner so that you can pursue other goals. The ideal situation would be if you could reduce both the rate and the term on your mortgage. Rate and Term refinances also involve going from an adjustable rate mortgage to a fixed rate mortgage or going from a balloon note mortgage to a fixed rate mortgage.

Debt Consolidation refinance: It is so easy to get overextended with bills. In fact, most people are overextended. Life comes at you fast. A reduction in income, a medical emergency, the birth of a new child, a divorce, and/or a loss of a loved one without warning and without a plan can change your financial profile overnight. Millions of people who are faced with these challenges utilize the equity in their home to consolidate bills and lower their payments. A debt consolidation loan could give you some wiggle room in your budget. It is important to maintain discipline and close out the accounts that were consolidated so that you don’t create more debt by running up the balances. A good debt consolidation loan should include a plan to keep your spending under control, save for emergencies and to totally eliminate debt--otherwise you’re prone to find yourself in a similar financial jam later in life.  

Home Improvement refinance: There is no place like YOUR HOME! Updating your home to suit your needs and your desires is what makes your home YOUR PALACE. Updates to your home can also increase the market value of it. Some updates that give you the biggest bang for your buck include updated kitchen, updated bathroom, adding central air, additional bedrooms and/or bathrooms, adding a garage, adding a fireplace and/or expansion of square footage. Warning: Don’t over improve your home. The value of a house is derived from comparable sales within the neighborhood. There is a ceiling on how much your home will sell for in a particular neighborhood no matter how much improvement you make to it. You may win bragging rights for having the best house on the street. However, when it’s time to sell your home, you may not get the price you believe it’s worth because the overall price in the community suggests a lower selling price.

Credit cleansing refinance: Good people oftentimes find themselves in bad situations, making it hard for them to keep up with their monthly payments--causing them to fall behind on various bills. Many homeowners who have accumulated equity in their home leverage the equity in their home to payoff delinquent accounts. This gives them an opportunity to bring accounts current and get back on track. Before putting your home on the line for past money management indiscretions, it is important to learn from past mistakes and adopt habits that will keep you on track.

Cash-out refinance: Borrowing money using your home as collateral is perhaps one of the easiest and cheapest ways to finance. Why? If you mess up, they take your home. People often refinance their mortgage and liquidate the equity in their home for cash to make big-ticket item purchases--such as a new car, vacation, furniture, and home improvements. Many small business owners use the cash for working capital.

Deed Transfer refinance: Blood relatives oftentimes avoid the necessary need for down payment and/or closing costs by opting to allow a relative to take over ownership of the home upon satisfying outstanding liens on the property. The obvious benefit in this transaction is reduced fees and the keeping the house in the family.

Land Contract/Lease with the option to buy refinance: A Land Contract or Lease with option arrangement establishes a vested interest in the property. People who purchase their homes by means of a land contract or lease with the option to buy are generally allowed to refinance versus a traditional purchase. It is generally required that the buyer has been under the contract for a minimum of 12-months with a clean payment history on the contract.  

(Mortgage and Personal Finance Expert Damon Carr is owner of ACE Financial. Sign up for Damon’s FREE Online Newsletter at www.allcreditexperts.com. Damon can be reached at 412-856-1183.)