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Things to think about

Weigh all the factors to see if refinancing is the right move.

Lower refinancing mortgage loan rates should be only one factor influencing your decision. Only by looking at refinancing from every angle can you be sure it's a wise financial decision.

What's your home worth?

Massachusetts refinancing rates and terms are based in large part on "loan to value" (LTV).  LTV is simply the ratio of unpaid mortgage principal to home value. (For example, if you owe $150,000 in principal on a home valued at $250,000, then your LTV is 60%).  The higher your LTV, the greater a risk you are to lenders.

So how do you determine your home's value? Obtain a professional appraisal. Usually your lender will arrange this. There are typically two types of home appraisals:

  • The less expensive "drive-by" appraisal is pretty much just that: The appraiser views your home from a distance without going inside. He or she assesses its condition and may also compare it with other neighborhood homes.
  • A full home appraisal will cost you more, but it can work to your advantage if you've spent a considerable amount of money on home improvements, landscaping additions, and/or upgrades. Give a list of these to the appraiser, with dates, costs, and copies of permits included.

How much equity do you have in your home?

As a rule, Massachusetts refinancing lenders require you to have paid down at least 20% of the appraised value of your home.

How's your credit?

A good credit rating (even if you have a high loan balance) will usually work in your favor. In fact, some lenders may allow borrowers with excellent credit scores to refinance to an LTV of as high as 95%.

What does your personal financial picture look like?

Lenders will assess your debt-to-income ratio by comparing your monthly, pre-tax income with your total monthly debt obligations-including any additional debt you'd take on when you refinance.

How much will refinancing cost?

Like your mortgage, there are additional costs involved in refinancing home loans. They include (but aren't limited to):

  • Appraisal fees
  • Closing/attorney fees
  • Recording fees
  • Credit reports
  • Underwriting fees
  • Private mortgage insurance
  • Loan origination charges
  • Points (charges for "buying down" your interest rate)

Ask your lender for an itemized list of costs to expect when you refinance.

When will we break even?

No matter how attractive Massachusetts refinancing rates may appear, your break-even point will tell you if it's worth it. Follow these three steps:

  1. Determine the costs (see above) associated with refinancing.
  2. Divide the total of those costs by the amount you'll save each month with a reduced mortgage payment.
  3. The result is the number of months it will take for your savings to equal the costs of your refinanced mortgage-in other words, your break-even point.

Costs of refinancing
----------------------------  = BREAK-EVEN POINT
Monthly savings

For example, if your costs are $6,000 and your monthly payments will be $200 less, then it will take 30 months for your savings to balance out your costs. Your break-even point is 30 months.

So if you plan to stay in your home for more than 30 months, then this particular mortgage will save you money over the long term. But if you expect to move within the next 30 months, you'll actually lose money refinancing.

NEXT: The Refinance Application Process