Refinancing Basics

Interest rates have been extremely low, historically speaking, for many years now, and lots of people have taken advantage of that, refinancing their mortgages. Rates have crept up a bit over the last year or so, but with the benchmark 30-year fixed mortgage rate recently near 4 percent, many can still save thousands of dollars by refinancing.

When you refinance, you get a new mortgage on your home, with your lender paying off your previous loan. (You may actually refinance with the same lender, though you don’t have to.) Refinancings typically involve a lower interest rate and smaller mortgage payments, but some opt for a shorterterm mortgage, resulting in somewhat higher payments on a home that will be paid off sooner.

When you shop around for a better deal than the one you’ve got, assess the many mortgage costs involved, such as the origination fee, discount points, the appraisal, the credit report, processing, title insurance, and the escrow fee. You can research available loans and interest rates at bankrate.com and other sites. Consider what “points,” if any, you might pay. A point is equal to 1 percent of the value of your loan. Points are paid upfront when you close the loan and permit you to buy a lower rate. They can make the most sense if you plan to keep the home and loan for many years.

If you can get a new mortgage at a rate that’s at least 1 percentage point lower than your current rate, you may reap enormous interest savings over 15 to 30 years, depending on how much you borrow.

In some refinancings, you can actually increase the amount of your loan by taking out extra funds — perhaps to pay down credit card debt or make home improvements. Be careful with this “cash-out” tactic, though — your valuable home equity will shrink, and cash-out interest rates can be higher.

In order to be offered the best interest rates, you’ll want to have or build a solid credit rating. Pay your bills on time, and avoid excessive debt.