Do Your Homework before Refinancing

With ultralow mortgage rates now starting to creep up, some homeowners might be thinking that it’s finally time to refinance.

Despite six weeks of steady increases, fixed rates eased this week and are still below 4 percent. That means borrowers who have higher mortgage rates may still be able to take advantage of savings.

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Refinancing originations nationwide totaled $1.5 trillion last year but are expected to fall this year to $1.1 trillion due to rising mortgage rates, said a projection from mortgage giant Freddie Mac this week.

Figuring out whether to refinance a loan can sometimes be difficult. Several factors should be considered, from length of the existing mortgage to the borrower’s financial goals.

“Make sure you’re not refinancing just because your neighbor is refinancing,” said Todd Pianin, president and founder of Samuel Scott Financial Group, a boutique mortgage company in San Diego.

How do you know if refinancing is the right choice? Here are six questions to ask yourself:

Q:Where am I with my existing loan?

A:Homeowners who refinance can get a new mortgage with longer, shorter or the same terms. Those who have a 30-year fixed mortgage can refinance into a 15-year fixed loan, or vice versa.

Extending the term could result in a lower monthly payment but may result in paying more over time because the payments are stretched out, said Gabe del Rio, chief business officer of Community HousingWorks. The San Diego nonprofit group provides housing counseling.

Shortening the term could result in higher payments each month but it would shave off interest over time.

Also, consumers should figure out how long they’ve been paying their existing mortgage to see how much principal and interest has already been paid, said Pianin, the mortgage broker. A borrower who’s in year 20 of a 30-year fixed loan generally shouldn’t refinance because most of the payments are going toward principal.

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