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Mortgage Refinancing

Since mortgage interest rates fluctuate over time, how can you decide when you should refinance your mortgage?

In the past, if the current interest rate dropped to 2 percent lower than the rate on your existing mortgage, refinancing was recommended. That rule still holds true; however, sometimes you may want to refinance in other circumstances.

A lower interest rate is not the only reason to refinance. Here are several other common reasons:

To move from an adjustable-rate to a fixed-rate mortgage
Many first-time homebuyers are forced to take an adjustable-rate mortgage (ARM) because they do not qualify for a fixed-rate loan. If you have an ARM that is about to go up, you may want to refinance with a fixed-rate mortgage and lock in the lower rate.

To build up equity at a faster rate
When interest rates drop, you may be able to refinance your 30-year mortgage and replace it with a 20- or 15-year mortgage with a similar monthly payment. This option especially appeals to homeowners who are nearing retirement and would like to pay off their mortgages before then.

To replace a jumbo mortgage with a conventional one
The current threshold for a jumbo mortgage is $359,650 (50% higher in Alaska, Hawaii, and the U.S. Virgin Islands). The difference in interest rates between jumbo and conventional mortgages can be significant. If you refinance a jumbo mortgage, you may be able to pay down enough to qualify for a conventional mortgage with a lower rate.

To eliminate private mortgage insurance
Most lenders add private mortgage insurance (PMI) to your monthly payment if your original down payment was less than 20 percent. If your home has gone up in value since you bought it, you may be able to eliminate the PMI requirement by having the house appraised. You can also get rid of the PMI by refinancing if you end up with more than 20 percent equity in your home.

To tap into your home's equity
You may want to refinance for a larger mortgage at a lower interest rate and use the extra cash to pay off debts.

To take advantage of a lower interest rate
This is the most common reason for refinancing a mortgage. The decision to refinance at a lower rate depends on variables such as refinancing costs, points, and how long you plan to stay in your home. Your should always shop for the lowest rates and lowest costs available.