Refinancing: The Downside

To refinance or not to refinance-that is the question. Even King Claudius may have been perplexed if he had to deal with refinancing the mortgage on his castle in Denmark. However, if you examine both the upside and the downside of the process, you should be able to find the appropriate answer, and know if refinancing mortgage is right for you.

Move to a fixed-rate

Since mid-2004, the Federal Reserve Board has raised interest rates 17 times, and may continue to do so if they feel that inflation remains a threat. This could cause rates on adjustable-rate mortgages (ARMs) to continue to rise. If you have an ARM, consider a new fixed refinance rate. Your monthly payment will be set for the long term, and you won't have any unpleasant surprises in your monthly mortgage bill.

Downside: You'll have to pay a whole new round of closing costs. As a result, if you plan on being in your home for only a few more years, a mortgage refinance may not make sense. If you're going to remain in your home for longer than seven years, however, it might be a wise move to scratch the mortgage itch and refinance your ARM to a new loan with a fixed refinance rate.

Refinance to an interest-only loan

If you're having trouble meeting your monthly mortgage payments, consider refinancing to an interest-only loan. This would give you the option of paying just interest for a pre-set number of years, which will likely lower your monthly payments.

Downside: You may not build equity as quickly as with a traditional loan. Also, when the interest-only period ends, you'll be hit with significantly higher monthly payments and may be forced to refinance yet again.

Deciding when to refinance your mortgage depends on your circumstances. Compare lenders, get quotes, know your rights, and select your advisors wisely. Then you can refinance with confidence, no matter how rotten things may be in the housing market where you live, or even in Denmark.