Should You Downsize Your Mortgage?

Written by , May 9, 2011

Should You Downsize Your MortgageWhen interest rates drop, homeowners tend to flock to mortgage lenders hoping to refinance. In good economic times, they are usually looking to not only take advantage of lower interest rates, but tap into their home equity for some extra cash. But in the face of dropping home prices, many are simply hoping to lower their monthly payments or pay down their mortgages more quickly.

Sometimes refinancing is a good idea. But surprisingly, getting that lower interest rate can sometimes cost you more than staying with your current mortgage.

Here is advice on some things to consider before you refinance your mortgage.

  • How good of an interest rate will you be getting? In general, you’ll need a rate at least two percentage points below your current rate to make it worth it once you factor in all of the costs of refinancing. If the new mortgage offers low fees, you might come out ahead even if the difference between rates is less. An online mortgage calculator can help you decide.
  • How long do you plan to stay in your home? Once you factor in your fees, it will be a few years before you reach the break-even point where you actually owe the same amount as you would have had you stayed with your previous mortgage. So if you plan to move within the next year or two, refinancing doesn’t make much sense.
  • Are you neglecting your retirement savings? Some people refinance for a shorter term in an effort to pay their mortgages off earlier with lower interest charges. That might not be such a good idea for younger folks, because they could be putting that extra money into their retirement funds. However, if you’re approaching retirement age and have been keeping your savings on track, refinancing for a shorter term could be a very good thing.
  • How much credit card debt do you have? If you have a great deal of high-interest debt, you would come out ahead by paying that off before you think about refinancing. When you pay down credit card debt, you’re saving yourself much more in interest than you would by getting a lower rate on your mortgage.
  • Has your credit score changed since you took out your original mortgage? If your credit score is lower than it was back then, you may not qualify for a lower rate. For this reason, it’s a good idea to check your credit report and find out your credit score before you make up your mind to refinance.
  • In some cases, refinancing can save you thousands of dollars in the long run. In others, you’re better off staying with your original mortgage. Take these factors into consideration before you decide to jump on those low interest rates.

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