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Mortgage refinancing can be a great opportunity, but be cautious

Refinancing a mortgage loan is not always an easy decision. Homeowners must be certain that the costs of doing a refinance will be made up by the reduced interest rate on the new loan. When the numbers look right, though, it can be a great opportunity.

At present, it may be a good time to undertake a refinance as the interest rate is likely to be on the increase in coming years. That is because the Federal Reserve recently announced its decision to reduce bond purchases. That, experts say, will likely translate into high interest rates on mortgage loans. For this reason, those who are considering a refinance may want to consider doing so sooner rather than later.

The benefits of refinancing, of course, include not only lowering one's interest rate and monthly payments and saving money over the long haul, but also changing the type of loan. An example would be going from a variable rate mortgage to a fixed rate.

Before undertaking a refinance, it is important for homeowners to understand how much they are really going to be saving and how long it will take them to gain back the cost of refinancing. Experts say that for refinancing to be financially worthwhile, the mortgage rate must drop by at least a full percentage point. Whether the interest rate is fixed, variable or hybrid makes a difference.

When undertaking a mortgage refinance, it is important to fully understand the terms of the agreement so that one isn't caught by surprise when an issue comes up. Those who run into legal challenges during or after a refinance should contact an experienced real estate attorney for advice and guidance.

Source: Wall Street Journal, "Refinancing a Mortgage? Do It Soon," Jonathan Clements, April 26, 2014.

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