In the 4th quarter of 2010, mortgage and refinance rates dropped to record lows sending homeowners in a refinancing frenzy. Today, single digit low rates are a far cry from where they used to hit in the 1980′s topping at 17%.

Homeowners often hear about reduced rates and jump to refinance their mortgage. However, before you jump on the band wagon, you should be aware of many factors that play into the process.

An attractive refinance rate is not always what it seems. By gaining a thorough understanding, you can calculate whether refinancing will benefit or hurt you in the long run.

What you May not Know about Refinance Rates

Refinancing a mortgage essentially means you are paying off your current mortgage loan and replacing it with a new mortgage. When interest rates drop, homeowners often jump at the opportunity. They anticipate that the lower monthly payments will help them save money over time.  Though this notion is mostly true, if the amount of money you pay out over the new term of your loan with your new refinanced rates is greater than your current mortgage, regardless of the reduced monthly payment, it is not in your best interest to refinance.

Did you know?

• With refinancing comes associated closing costs such as appraisal, processing, application, recording fees, etc. and these costs are often rolled into the loan, thereby increasing the amount of the refinanced mortgage.
• When you increase the amount of your loan, your equity (the market value of your home minus the amount you owe to the lender) you have in your house is decreased.
• In order to lower the monthly payment, the term of the refinanced loan is often extended, increasing the total amount of money you will pay in the long run.
• You may incur a prepaid penalty for paying off your existing mortgage. Check your paperwork or speak to a professional concerning this matter. If you are responsible to pay a penalty it may not be in your best interest to refinance.

Is it Right for YOU to Take Advantage of Reduced Refinance Rates?

It’s important to take a step back and crunch the numbers associated with both scenarios (maintaining your current mortgage or refinancing). If you need assistance, you can consult your broker or lender about your options and which ones make the most sense from a financial standpoint.

In order to effectively compare the numbers, you must first know every cost you will be required to pay. Ask your lender for a full list of all associated closing costs and a full disclosure of fees and taxes. Add these fees on to the existing balance of your loan and determine if you will be paying more money in the long run by extending the life of your loan even with the reduced refinance rates.

You can use this refinance rates calculator to help you calculate the numbers easily

When is it NOT a good idea to consider refinance?

• Your property value has dropped – If you refinance 80% of your appraisal value, your original loan amount may actually be higher due to the decreased appraised value of your home, which means the new loan amount will not be sufficient to pay off your existing mortgage.
• Have you refinanced before or taken out a home equity loan? It’s not wise to refinance if you already used up most of your equity.
• You are close to paying off your existing mortgage – If you are close to the end of a 30 year mortgage and you refinance, you will lose equity in relation to the amount borrowed above the remaining balance on your existing mortgage.

Take Control of your Future

Perform the necessary research and speak to a professional if you are confused with any or all parts of the refinance process. With many variables to consider, it’s important to take your time and refrain from rushing the process. A nice, shiny refinance rate should not be your sole purpose for refinancing. Consider your entire situation so when and if you refinance, you will be assured you made the right decision as it relates to your current and financial future.