Mortgage refinancing is widely advertised right now, and even some of your coworkers or relatives may have opted to do a mortgage refinance. The reason is obvious: if one is stuck with a mortgage rate of say, 8%, and the mortgage refinance promises to lower this rate by 2-3%, then why not go with the lower rate? Or, perhaps you’d like to cash out of your house a little, using that money for home improvements or for investments. Both reasons are common for getting a home mortgage refinance.

However, it’s never that simple. Having myself refinanced my mortgage at least three times now, I know from experience that mortgage refinancing can be tricky- and sometimes it’s not even worth the hassle.

Before you can assess the wisdom or foolishness of doing a mortgage refinance, you will need to know/estimate the following items: what is your current mortgage rate, what new (lower) rate can you obtain, how long do you plan to own your home, and (most important) what will be the final costs of the refinance. 

Finding out your current mortgage rate should be easy; more than likely, it is mentioned somewhere on your monthly mortgage statement. If not, you will need to call up your lender and provide your account number.

The next part involves calling up lenders and obtaining new rate quotes from them. Lenders fall in one of two categories: wholesale and retail. Wholesale lenders simply underwrite and fund the loan, and lock in the loan terms. Retail lenders do all this plus counsel customers, take the application, and process the loan. For the most part, you may not even notice if you are dealing with a wholesale or a retail lender, since the wholesale lender may employ people from other companies. The rule of thumb is that, the larger the firm, the more likely it is to be wholesale. 

However, you may never deal with a lender directly. This is because there are a lot of mortgage brokers out there too. These third-party agencies do not give you the loan directly, but rather find a loan for you. One such  third-party agency is LendingTree, for example. Mortgage brokers do not charge you for their services, but rather the mortgage loan lender that you eventually choose.

Which way is better? Ultimately, the party that gives you the lowest rate, of course. However, in my personal experiences, I have found mortgage brokers to offer more competitive rates, since they are taking bids from several loan agencies and/or banks.

I did not mention financial advisors as another, though rather uncommon, way for securing a mortgage loan. A financial advisor’s do not come cheap (on average, you’ll pay $600 for his/her services). The reason you may want to employ one during your refinance search is because, if mortgage rates continue falling after your closing, the rate you lock in today can be adjusted later on with no additional charge to you (you simply refinance again). This is just one of the special services provided for you by a personal financial advisor. Be sure to ask for it- if it’s not one of your benefits, then you need a better advisor.   

Once you’ve received your mortgage rates, it’s time to sit down and seriously take stock of your life and where you see yourself 1 year from now, 3 years from now, and so on. Ask yourself if you are happy living where you are now. If you do not plan on staying in your house for the next five years, then mortgage refinancing may not be right for you. If your current job is uncertain, or if you have no job, then again, mortgage refinancing may not be right for you.

Why?

Because we almost forgot about the last part of getting a mortgage loan, which is the cost. And there are actually several costs involved: underwriting, tax service, title, recording, appraisal, processing, and even lender administrative fees all take a bite out of the money you are promised to save by refinancing. For a loan that runs about $160,000, expect to pay from $2,000 to $2,500 simply for closing costs. And don’t be afraid to ask for clarification about odd or unexpected fees on your closing documents- I’ve caught several errors that way.

And then there are points.

Points are the upfront fee that a lender charges for the "privilege" of lowering your interest rate. Typically, 1 point is defined as 1% of the principal amount loaned. So, if your $160,000 loan is charged 2 points to have an interest rate of 4%, you will pay an additional $3,200 for it.

Is it a good idea to pay points? Personally, I’ve always refused to pay points, no matter how low an interest rate was promised. My reasoning was that I could take that extra money and use it to fund an additional month (or even two) of my mortgage payments. Similarly, I could take that cash and use it to pay off my principal amount directly.

However, in some cases, it is worthwhile to pay points. For example, consider if you take an $85,000 loan at 7% and 2 points versus the same loan at 8% and no points. The cost of the points will be $1,700, and it will take 29 months to regain the money paid for those points. However, if you live at least 30 months in the house that you refinanced for 7%, you will come out ahead on your loan.

It’s not always easy to decide if you should do mortgage refinancing. If you are a novice in this arena, you may be best served by a financial advisor who will look after your interests. As mentioned before, financial advisors can do a lot of things for you that standard loan agencies or mortgage brokers won’t, like allowing you to refinance again at a later time should mortgage rates continue to fall. They will also calculate the best loan options for you.

If you’d rather go it alone (and save yourself that $600 or so), there are lots of resources out there on the web. Mortgage calculators and tutorials abound, if you just know where to look. Here are a few:

LendingTree provides lots of useful advice on obtaining a home refinance, along with calculators, how to check your credit score, and lots more.

E-Trade has some good refinance information, plus they promise to beat your current lender’s price or pay you $500.

ING Direct offers a colorful and easy-to-navigate web site with helpful refinance advice. Also, their mortgage rates seem very low and carry few closing costs.