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Mortgage Refinancing Dos and Don'ts

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With the Fed cutting mortgage rates to record lows that date back to President Nixon's era, you might be thinking about how much money could be saved if you refinance your home.

In January, the Fed cut mortgage rates at least a point and it's expected to go as low as 4.5 percent for 30-year-fixed mortgages.

Financial experts say refinancing may be a great idea for some, but first homeowners should weigh the pros and cons before dropping the cash. Before deciding to refinance and go through a lengthy and costly process, avoid closing costs first by asking your existing lender to renegotiate your loan terms without going through the formal application process.  If your lender isn't willing to negotiate, you should investigate whether the benefits of refinancing outweigh the negatives.

Often, homeowners hesitate to refinance because they are under the misconception that it will cause their property taxes to increase.  

Refinancing is not a reappraisable event that would cause an increase in property taxes, as long as the title to the property continues to be held in the same way before and after the refinancing.  If the new market value is less than the current assessed value, the homeowner can request the County Assessor's Office to review the value. If the County Assessor lowers the assessed value, which is a temporary reduction, the property taxes would decrease.

Assessment Appeals

When refinancing is a good idea:

  • If you plan to own your home for another year or more
  • If costs of a new loan can be recouped in two years
  • If you could lose your job within the next year. Without income, it will be near impossible to secure a new loan later
  • If the new rate is at least one percentage point lower than the existing loan rate
  • If you can save hundreds in monthly mortgage payments

When refinancing is not a good idea:

  • If you plan to sell within a year; you won't recoup costs of the new loan
  • Costs to apply for a new loan can be costly (the points, including appraisal and closing costs). You should shop around with smaller banks and credit unions. Larger banks typically do not have the best rates.
  • If current value of the home has dropped beyond what you owe, you may be required to buy additional mortgage insurance, which can be expensive.