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Objective

Obtain a lower payment
Obtain a lower interest rate
Convert my adjustable rate
Obtain cash at closing
Other

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You may have seen the ads and heard the exciting news Interest rates have dropped. And you may think that means it's time to head to your local lender or hit the Internet in search of a company to refinance your mortgage. Don't be in a hurry until you consider the costs.

Remember those pesky closing costs that hit you when you took out your original loan? Unfortunately, those weren't just associated with an original home loan. You'll be faced with a very similar set of costs for refinancing. And that's a big reason to consider whether the drop in interest rates is sufficient to prompt you to refinance.

Start by taking a look at interest rates across the board, but don't stop there. A terrific interest rate isn't going to do you any good unless you qualify for that rate. Most lenders will advertise their lowest possible rate, but borrowers have to qualify for that low rate. You may have to have an exceptionally high credit score, have significant equity in your home or meet other criteria for that rate. The rate that you actually qualify for may not be that much different than the current rate on your existing mortgage.

Remember that you're probably going to have to pay for an appraisal and may have to pay for other services, depending on how long it's been since you took out the original loan. As a rule of thumb, an appraisal that's more than a year old won't be accepted as reflective of the current market value by most lenders. You may also have to have a home inspection so that the lender can determine the condition of the house, especially if you purchased the house when repairs were needed. Once you add up the expense of closing a typical loan, you'll probably find that the interest rate would have to be significantly lower in order for you to recover those costs in a reasonable amount of time. Most experts say they don't recommend refinancing a mortgage for interest savings alone unless rates have dropped by at least one and a half to two points.

Finally, keep in mind that it will probably be a year or so before you realize any real savings from the refinancing process. If you're considering selling the house in that timeframe, it's probably not going to offer any financial benefits to go through the refinancing process.

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