Refinancing: What's the Right Amount for You?

Life seemed simpler in the olden days. Gas was cheap, everything was made in America, and borrowers always put at least 20 percent down on a mortgage loan. In the old days, the down payment would often dictate the size of your mortgage: whatever you could afford to pay was 20 percent of the mortgage loan you could handle.

Times have changed, and these days, there's a steady stream of lending choices that make the "20 percent down" an option rather than a necessity. Therefore, you need to look to other factors to determine what the right number is for you if you want to refinance your first mortgage.

A look at mortgage options

Borrow what you can afford. Lenders typically will only allow buyers to borrow 33 to 38 percent of their gross monthly income. However, as the lending world's appetite for more loans becomes more voracious, you'll find financial institutions eager to let you stretch your budget to the breaking point. Before you close on that mortgage refinance, do some serious number crunching, and find out your exact comfort level in terms of a monthly payment. Remember, just because you can tap equity doesn't mean you should.

Twenty percent down. The rule of 20 percent down might seem a little conservative and old-fashioned if it didn't carry with it one unfortunate, glaring truth: Private Mortgage Insurance (PMI). Lenders require you to carry PMI if you can't come up with a 20 percent down payment. This insurance is risk-management for the lenders, and it can cost you upwards of $100 or more on your monthly loan payment if you get stuck with it. If it's refinance time, a down payment that helps you avoid PMI makes sound financial sense.

Closing costs. The closing costs to refinance your mortgage are approximately the same as they were the first time around. If you're refinancing within a few years of your original closing, you may be able to use some documents, like the appraisal, the second time around. When calculating the right amount for you, take into account these additional costs. They can most likely be rolled into the amount you're borrowing, but you will, at some point, be paying for it.

Things aren't as simple as they used to be. But that doesn't mean there aren't answers to the difficult questions. Take your time and use the preceding tips as a launching pad for your mortgage search. In the end, you'll settle on the right loan size for your refinance.