Thinking refinance? Here's the smart way to do it!

At the risk of annoying some mortgage lenders, here is my advice if you are catching the refinancing bug. I know that a lot of my clients have thought about refinancing since the rates have come way down in the past month. Here is my advice to refinance the smart way, and not to step backwards.

•1.) Never go backwards in years! If you have 27 years left on your loan, do not go back to a 30 year loan. If you do, all your savings will be eaten up by the additional time you have added to your loan. If you have a $150,000 loan and you go from 27 years left back to 30 years, you will pay an additional $ 24,750 at 5.5%, which means your payments would have to go down over $ 75 per month just to get back to where you started. That is a sucker bet for the lender, and a bad bet for you. Many lenders are offering 15, 20, and 25 year loans that would be better. Remember, the idea is to save money AND pay off your home sooner.

•2.) To see if you should refinance, apply the 3 year test! If the cost of refinancing your home can be made up in savings over the next three years or LESS, then it may be worth it (remember rule 1). For example: Say you have a loan that you owe 150,000 balance at a rate of 7% and you have 25 years left on it. You can get a new 25 year loan at 5.5% interest rate, and the closing costs on the refinance are $2800.00. Your old house payment, not including taxes and insurance were probably around $ 1,035.00. Your new payment will be about $921.00, a savings of $114.00 a month. If it costs you $2800 to refinance but you save $114.00 per month and did not increase the length of the loan, you will pay off your costs of refinancing in about 25 payments, a little over 2 years. This is a good deal and you should do it.

•3.) Remember, there is no such thing as a "no-cost" refinance. Everything has a cost, whether they raise your interest rate to cover the cost or add it to how much you owe.

So, do the math and see if you can refinance. Just be careful because there are ways to refinance smart and ways to get in over your head. Use some basic math and you may come out a big winner.