1. How long you plan to stay in your home. If you know you will be moving in a year or two it may not make sense to pay the closing costs and other fees associated with refinancing.
2. How much it will cost you to refinance. Lenders can give you a Good Faith Estimate of closing costs and other fees. Financial experts say a typical home refinance costs about 2% to 3% of the home loan amount.
3. How long it will take you to recoup the costs. If you are saving $100 per month on your new home loan and it costs $2,000 to refinance, it will take 20 months before you have paid back the cost of the loan. After 20 months, the savings will be completely yours.

For most homeowners, the decision to refinance is based on saving money on their monthly payments. But some homeowners choose to refinance to a shorter loan so they can build equity faster and pay off their home loan completely within 15 years or sometimes even 10 years.

A Mortgage Refinance Can Lock in the Best Rate

Homeowners with adjustable rate mortgage loans or an interest-only home loan may want to gather refinancing information to see if they would be better off locking into a fixed-rate home loan. Most experts suggest that mortgage interest rates should rise a little bit by the end of 2010 and a little more in 2011. Locking in a lower rate now may cost a little more each month if you are paying only the interest on your loan or have a low adjustable rate, but plenty of homeowners prefer the security of knowing that their mortgage payments will stay the same for the entire loan. If you plan on staying in your home for the long term, a fixed-rate loan may be your best choice.

While the decision to refinance your home should be based on your short-term and long-term financial goals, you should also use a calculator to see how a mortgage refinance meets your needs.

Refinancing a Second Mortgage Depends on Your Goals

Whether or not you can refinance a home with two existing mortgages depends on a number of individual factors. First, decide what your goals are when applying for mortgage refinancing, since this influences whether you try refinancing one or both of your loans. Think about whether your priority is reducing your monthly payments, paying off your mortgage faster, or even accessing the equity in your home for cash for college tuition, home improvements, or debt reduction.

If both of your mortgage loans are held by the same lender, the process of refinancing your home may be simpler. The important thing to realize is that the second loan is riskier for the lender than the first loan. When a homeowner defaults on their mortgage loans, the lender forecloses on the property and sell it. Unfortunately, in today’s real estate market, when home values have declined, the sales price may not be enough to pay off both loans. The first loan is paid before the second loan, so the lender holding the second mortgage may not be paid at all. Some lenders now will not approve second loans at all.

What If I Can’t Refinance My Second Mortgage?

Refinancing your second loan could be difficult in today’s market conditions, so you may want to consider either wrapping the two loans together into one mortgage or refinancing the first loan at a lower rate and paying off your second loan with the extra money you have each month. Check with your current lender and with other lenders to compare offers. Be sure to look at the fees they charge for refinancing as well as interest rates.

The more refinancing information you gather, the easier it is to decide if wrapping your loans together or refinancing just one loan makes sense for you.

Refinancing Your Way to Becoming Debt-Free

If you have debts to pay in addition to your mortgage, refinancing your home should be part of your plan. Gather refinancing information to see if you qualify for a cash-out refinance, which could be the quickest way out of debt. A cash-out refinance means that you increase the size of your mortgage and use the extra money to pay off credit card debt, car loans, student loans and any other debt. Typically, a home loan has a lower interest rate than your other debt. The only problem with a cash-out refinance is that many homeowners have lost equity in their homes due to recent decreases in home value, so they may not have the 20% or greater equity in the home that most lenders require for a cash-out refinance.

Even if you don’t qualify for a cash-out refinance, a low-cost refinance could still benefit your financial situation. If you end up with lower mortgage payments, you can take the extra cash you now have to pay down your other debts faster.

Options for Decreasing Debt

Whether the cash comes from a refinance or some other source, starving your debt requires a plan:

• Order your debts from smallest to largest, paying off the smallest one first to get motivated. Next, use the additional money from that pay-off to increase your payments on the next debt. Continue increasing the size of your payments as you pay off debts one by one.
• Order your debt by interest rate, paying off the debt with the highest interest rate first.
• Trim your expenses and add every dollar you save to your debt payments.
• Use every windfall or bonus check or tax refund to pay down your debt.

No matter which of these methods you choose, looking into refinancing your home is one way to increase the available funds for your pay-off plan.

Reasons to Consider Mortgage Refinancing

Determining why you want a home refinance is an important first step. Depending on your financial goals, you may look for different criteria in a refinance loan.

• Low interest rates. For most people, a home refinance starts with a lower interest rate loan that reduces the amount of interest you pay over the life of the loan
• Lower monthly payments. Many people choose refinancing as a way to reduce their expenses so they can pay off other debt or save more
• Shortening the length of the mortgage. Many homeowners want to own their home without a mortgage and opt to switch to a 15 or 10-year home loan when they can afford it
• Switching to a fixed-rate home loan. Borrowers with an adjustable-rate mortgage or interest-only loan may want the security of a 30-year fixed-rate loan 

Once you’ve determined what your refinance goals are, gather all your bills and organize your finances so you can evaluate your budget before contacting a lender about a low cost refinance.

Budgeting for a Home Refinance

Pull together the following items so you can estimate how much you should be spending on your housing payments.

• Pay stubs
• Tax returns
• Bank statements
• Monthly bills (credit cards, car loans, student loans, day care, etc.)
• An estimate of your discretionary spending on entertainment, recreation, meals out, etc.

In general, financial experts recommend that your monthly housing payments (including mortgage principal and interest, taxes, insurance, and homeowner association fees) should be at 30% or less of your gross monthly income. This number varies and depends on other factors such as your income, your other debts, and whether you live in a high cost area. Overall, your debt-to-income ratio should be about 45% of your gross monthly income.

A mortgage refinance can help you get your budget into shape and may allow you to save additional money for an emergency fund, college tuition, or retirement. Preparing a budget can be a tool to motivate you to contact a lender to see if refinancing your home can help you reach your goals faster.

When gathering refinancing information, one of the first steps you should take is to get an estimate of your current home value. Most lenders require an appraisal, but you can get an idea of your home value before applying for a home loan by asking a real estate agent or using an online home value estimating calculator.

Options for Low Equity Home Refinancing

Even if you owe more on your mortgage loans than your home is worth, you may still be able to refinance via the government program HARP (Home Affordable Refinance Program).

Another option for some homeowners is an FHA-insured refinance, available to homeowners with as little as 3% equity in the home. FHA loans do require mortgage insurance in both an upfront payment and a monthly installment, but you still may find that refinancing your home is worth it if you can significantly lower your mortgage interest rate.

Things to Consider with a Low Equity Refinance

Conventional lenders charge private mortgage insurance (PMI) on mortgage loans for homeowners with less than 20% equity or who make less than a 20% down payment. You can ask a lender to calculate the additional cost of PMI to see if it still makes sense to refinance.

While many homeowners opt to roll the closing costs for a home refinance into the new home loan, if you have limited equity in the home, it may not be possible to simply wrap the costs into the principal. Consult with a lender to see if there are other options for paying for closing costs. Some lenders allow you to pay the closing costs by charging a slightly higher interest rate.

If you have low equity and a high interest rate, you might want to consider paying some cash at settlement in order to meet the lender guidelines on how much you can borrow. In the long run, you can often still save money on your mortgage even if you pay cash for closing costs and to pay down a little of your principal.

Mortgage lenders want to see homeowners with decreasing debt rather than increasing debt, so consumers should look into the possibility of working with a debt management company and receiving credit counseling. While the goal of becoming debt-free is worthy, the method you choose can have a long-lasting impact.

Debt Management Solutions

First, contact your creditors directly to see if you extend your payments or make alternate arrangements. Work out your own repayment schedule by developing a budget, listing all your debts with interest rates and minimum payments, and then paying them off systematically.

Remember, though, if a creditor agrees to settle a debt for less than the full amount, this will be reported on your credit report and could lower your credit score. The gap between what you owe and what you pay could also be reported as taxable income.

If you want some guidance to help manage your debt, you can meet with a reputable, non-profit credit counselor for budget advice or a repayment schedule. Reputable debt management companies should offer credit counseling along with debt consolidation services. Expect to pay a moderate monthly fee–from $12 to $50–and fees for set up and counseling services.

Beware of debt settlement companies that charge a high upfront fee. The National Foundation for Credit Counseling states that fees over $50 for set up and $25 for monthly services may be excessive.

Cash-Out Refinance

Tightened credit standards have reduced the availability of the cash-out refinance, in which the homeowners take out a larger mortgage than their current loan and pay off other debts with the proceeds. But borrowers with significant equity in their home should see if they qualify for refinancing in order to pay off high-interest debt. The savings can be significant.

Even if you do not qualify today for a mortgage refinance, as you succeed in decreasing debt your ability to qualify for home refinance loans should increase.

Is No-Cost Refinancing Possible?

Mortgage refinancing always carries at least a little cost. The costs vary from place to place and lender to lender, which is why consumers should always compare offers from several lenders. Typically, refinancing your home costs 3% to 6% of the mortgage.

A no-cost refinance allows borrowers to avoid paying upfront costs for a new home loan. Typically, this can be accomplished in two different ways:

• The lender covers the closing costs themselves, but charges you a slightly higher interest rate (perhaps 0.5 or 1% higher than the current market rate) in order to recoup those costs. You pay that higher interest rate as long as you have that home loan.
• The lender wraps all refinancing costs into the loan. The home refinance costs become part of your principal balance, so you end up paying the fees with interest over the life of the home loan. For example, if you have a $200,000 loan, a home refinance could incur $6,000 in closing costs. If you choose to wrap those costs into your home loan when refinancing, your new balance would be $206,000.

Most borrowers choose to wrap their costs into the loan in order to avoid reducing their bank balance with closing costs. When you gather refinancing information, make sure you ask each lender for a comparison of the principal, interest rate, monthly payments, and any fees for a no-cost refinance as well as a refinance in which you pay the costs yourself at closing.

Some lenders require a prepayment penalty if they have rolled your closing costs into the loan. Make sure you check the fees and penalties of any home loan.

To determine if a refinance is advantageous for you, you can ask your lender to help you estimate the break-even period when the costs of refinancing your home are fully recouped by your savings. You can also do the calculation yourself with the help of an online mortgage refinancing calculator that compares your current loan with other mortgage loans.

Interest rates remain low enough that many homeowners stand to save by refinancing. As long as you do your homework, closing costs don’t have to stand in your way.

Not really. The best mortgage for somewhat at the end of a career would let you pay more at the beginning, when you are in your peak earning years, and taper off to a lower payment when the pension kicks in. And there’s no such animal. Unless you create it yourself.

Prepaying Your Mortgage Now Gives You a Cushion Later

Once your retirement is fully funded, concentrate on prepaying your mortgage as much as you can afford. If you can refinance to a 15-year loan, by all means do so. If not, make whatever principal reduction payments you can. Say for example that you refinance today to a 30-year loan at 5.25%, and you plan on retiring in ten years. Your balance is $300,000. Using a mortgage amortization calculator, you can see that your payment is $1,657 per month and in ten years your balance would be $245,845. But you’re earning enough to pay $2,500 a month without causing yourself undue pain. So you add $843 to your payment. In ten years, your balance is only $113,176.

Now, here’s the good part. You don’t want to pay $2,500 when you’re retired. You don’t want to pay $1,657 either. By having your lender re-amortize your loan (many will do it for a $250 fee), you get a payment obligation of only $763 per month. This is because your prepaid balance is stretched out over the remaining 20-year term of your home loan, allowing you to pay more when you have it and less when you don’t.

Debt Management Has Side Effects

However, debt management may also have some consequences you are unprepared for. If your credit report shows that you are in a credit counseling or debt management plan, for example, FHA lenders treat you the same way they would if you had filed for a Chapter 13 bankruptcy. You may be able to get a mortgage, but you’ll have to have been paying on your plan for at least twelve months. The effect on your credit score usually depends on who your creditors are and their policy for reporting your payments.

Citibank, for example, merely adds a note to your payment history that you are enrolled in a credit counseling program. And that notation has no influence on your FICO score. But First USA reports its cardholders as delinquent until they have made three consecutive on-time payments through their debt management plans. Those three late payments can torpedo a score by a hundred points!

So Should You Try Debt Management?

Despite the claims of some TV advertisers, enrolling in credit counseling or debt management is not for those who just want more favorable terms from their creditors. If you can make your payments, but just want a lower interest rate, don’t put your credit score at risk; just call your creditors yourself and ask for a lower interest rate. If they don’t budge, you can always move your account.

Conversely, if no plan could get you out of debt in five years or less, bankruptcy may be a better option. Most credit counseling or debt management plans are designed to retire your debts in two to four years if you stick to them. If your debt will stretch out for years and years, it’s probably time to talk to a lawyer. A bankruptcy trustee could put you in a Chapter 13 program that could get you debt free in three to five years.

Debt management is a viable alternative if you can’t make anything more than your minimum payments or your debt payments exceed your income. But skip the “as-seen-on-TV” outfits. Look for an accredited consumer credit counseling service that provides genuine help.

GFE = Increased Risk to Lender

Every time it issues a GFE, the lender assumes some extra risk. That’s because even fees charged by third party providers like title companies must be guaranteed within certain tolerances. And a mistake by an employee can cost a lender the entire profit on a mortgage transaction. For example, if someone prepares a GFE and mistakenly inputs title charges of $800 and the actual charges end up being $1,100, you have to pay only $880 (the estimated charges plus an allowed 10% tolerance), and your lender has to pay the remaining $220.

Easier for You = Harder for Some Lenders

While many lenders have no problem at all with issuing GFEs, and most welcome the transparency which makes it harder for the bad guys to compete unfairly with bait-and-switch tactics, some prefer not to disclose interest rates and fees upfront. The longer you are involved with a lender, the less likely you are to shop around for your loan. An article in Mortgage Professional Magazine counsels loan agents to avoid issuing a GFE until it’s required by law and also advises them not to guarantee an interest rate more than one day.

So, How Do You Get a GFE?

Pass up any lender that doesn’t feel it’s interest rates will stand up to comparison. If you provide the following information, it triggers the requirement for a GFE within three days:

• Your full name
• Your monthly income
• Your Social Security number
• The property address
• The loan amount
• The property value or sales price

Once the lender has all of this information, you get to have a GFE and all the guarantees that come with it. Other factors that can change the price of your mortgage are the property use and property type. Verify how long the mortgage rate is guaranteed–mortgage rates change with financial markets all day long so don’t expect a rate to be in force for long unless you lock it in.

A new GFE can be triggered by changes in income, property value / sales price, loan program, locking your rate, or your lock expiration. The final GFE is the only one that must essentially match your settlement statement. To be thorough, shop now, and then shop again when you prepare to lock your refinance interest rate.