Home refinance: When should you consider it?

Is a home refinance the best way to re-tune your finances?

Maybe. But if you obey every advertiser, you could find yourself taking questionable prescriptions, sharing a hangover with the “most interesting man in the world,” collecting 2,000 “hand painted limited edition” thimbles, or owning more cars than Jay Leno.

So should you click that ad telling you to start a home refinance RIGHT NOW?

Maybe you should. After asking yourself a few questions.

What’s so great about a home refinance?

A home refinance might be the smartest move you make all year. Or not. Refinancing could keep more interest in your account and put less in the bank’s.

It could help you make a really smart investment. Refinancing could bail you out of an emergency, let you retire earlier, or move up the date of your mortgage-burning party.

What could go wrong with a home refinance?

However, the home refinance only works when you take out the right loan for the right reason. Here are some of the wrong ones:

• You want a Ferrari but can only afford a Fiesta
• Your dream is to open a restaurant — and at 62, you’ve never even worked in one
• Your 40-year-old son wants you to fund his third master’s degree
• Las Vegas

Most personal finance experts agree that long-term loans (like mortgages) should not be used to pay for short-term pleasures. Sorry.

The right products, the right reasons

Here’s the part where you might want to click that refinance button:

• There are better interest rates available now
• You could pay off your mortgage faster without a huge payment increase
• Your ARM rate might move higher unless you lock in a fixed rate loan
• Grabbing an assumable government loan could make your property easier to sell in a few years
• You could increase your house value with some home improvements
• You could keep your interest rate low, even if you later turn your current home into a rental

Will you save money?

If you want to refinance to save money, that’s an easy decision. Determine how long you plan to keep your house (or mortgage, if you’re going to turn it into a rental).

Next, see if you can expect to save money during this time. The most obvious way of determining this is to ask lenders for quotes for “no-cost” refinancing.

Of course, there are costs involved, but the “no-cost” variety offers you a higher interest rate, and in turn, the lender covers the financing costs.

So if you’re paying 4.25 percent on your current loan, and you can get a loan with no costs at a 4.0 percent rate, that’s a no-brainer.

What if you have a decent rate but plan to sell your house in just a few years? Consider a 3/1 ARM. As of this writing, you could trade a 30-year fixed rate at 4.0 percent for a 3/1 ARM at 2.5 percent.

A mortgage calculator is very helpful when test driving a mortgage refinance. Or simply contact a few lenders and see whose best offer will save you the most money.

Will you save time?

Another valid reason for refinancing a mortgage is to stop writing that annoying check each month. If you’ve been paying your home loan for a number of years, you could shorten that payoff period and probably get a lower interest rate too.

For instance, if you started with a $300,000 mortgage at 4.5 percent eight years ago, your balance is probably about $254,451, and your principal and interest payment is $1,520.

You could refinance your loan to a 15-year mortgage, getting your rate lowered to 3.25 percent. While your payment increases to $1,788, your mortgage will be repaid eight years sooner. That’s about $145,000 in payments you won't have to make!

Do you need breathing room?

Sometimes, we know what the right thing is, but we can’t do it. You know, for instance, that stretching out the remaining balance on your home loan will lower your payment, but it costs you more interest in the long run.

The loan in the example above — the one with the $254,451 balance and the 4.5 percent interest rate? That homeowner might be able to reduce the monthly payment from $1,520 to $1,005 each month for three years with a 3/1 ARM at 2.5 percent.

That’s about $500 less each month, but of course, total repayment for the loan is extended to 38 years. Eight more years. In addition, the new loan is an ARM. There is no guarantee that the rate will stay that low after three years.

But sometimes you need breathing room. You need to buy yourself three years to pay off higher-interest debt, finish college, or take care of a family emergency.

As long as you’re aware of the true cost of refinancing, and make an informed decision, and form a budget and a plan to repay it, there is nothing wrong with refinancing your way out of trouble.

What are today’s refinance rates?

Current mortgage rates help you decide if a refinance is the right decision for you. Offers from competing lenders can help you with the math and make the right choice.