Thinking about Refinancing ? Read This...

If you're a homeowner, you may have refinanced your mortgage, or perhaps the recent declines in mortgage interest rates have you thinking about it.

For the first time since 2005, mortgage interest rates have dipped below 6%, triggering a small boom in refinancing. Applications to refinance loans jumped 135% between November 2, 2007, and January 25, 2008, according to the Mortgage Bankers Association.

Depending on your mortgage, refinancing can lower your interest rate, reduce your monthly loan payment, and leave you with additional money to pay down debts and invest for retirement. A lower mortgage rate can translate to significant savings in the long term—if you use those savings wisely.


A chance to revamp your finances

Consider savings from your mortgage refinance a gift that can keep on giving—an opportunity to invest in your future.

"If you're able to reduce your mortgage cost through refinancing, that gives you the ability to save more for retirement or your children's college expenses," said Ray Querey, a senior Certified Financial Planner™ in Vanguard® Financial Planning Services.

To make the most of refinancing, ask yourself three questions:

1. How much am I really saving?

If you currently have a 30-year fixed mortgage worth $200,000 at 7% interest, slashing your rate to 5% would cut your payment by nearly $260 a month, or about $3,085 a year, according to Bankrate.com. It may not seem like much at first glance, but it adds up. You could be saving more than $12,000 over the next four years.

Here's the caveat: Refinancing a mortgage costs money.

You can pay anywhere from $1,500 to several thousand dollars to cover your closing costs, including fees for an appraiser, lender, attorney, and insurance. The mortgage lender may also charge you points at 1% of the loan per point.

A mortgage calculator can help you determine the difference between the principal and interest of your new loan compared with your current mortgage. Don't forget to include the years it will take you to pay off each loan.

Now figure out your monthly loan payment. How long will it take you to recoup, in monthly savings, the cost of refinancing? Generally, if you don't plan to live in your house longer than it will take you to cover your closing costs, it may not be worth it. Nonetheless, you should consult a mortgage lender or broker for all the costs under different scenarios.

2. How can I make the most of my savings?

Now that you have an estimate of how much you'll save by refinancing and how long it'll take you to break even on your closing costs, you can plan ways to spend the extra savings. Begin by taking a close look at your finances:

* Do you have high-interest credit card debts? Vanguard's financial advisors recommend you first tackle burdensome credit card debt. Paying down these high-interest debts will automatically increase your saving potential.
* Do you have an emergency fund? If you haven't already done so, set aside money to cover 3 to 6 months of your expenses. Place it in a lower-risk, easily accessible account such as a money market fund. This will come in handy during an unexpected emergency, illness, or layoff.
* Are you contributing to your employer's retirement plan? Not contributing could leave your nest egg in a precarious state. And failing to take advantage of matching employer contributions is like throwing away free money.

3. How can I benefit from my savings in the long term?

Even if refinancing won't amount to thousands in savings each month, every little bit counts.

"Even if you invest an extra $50 a month ($600 a year) in a well-balanced portfolio, it's incredible how quickly and how much that money can grow over time," said Beth Orford, a principal in Vanguard's Advice Services Group.

"If it's a small amount, you probably won't miss it. You probably won't remember that great dinner or new pair of shoes you might have spent it on, but five or ten years from now, you may see your account balance and say, 'Where did all this money come from?'"


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