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In recent years, interest rates available on mortgages have fallen to record lows. Many homeowners have refinanced their mortgages to take advantage of these lower rates, to eliminate the risk associated with adjustable-rate mortgages or to take equity out of their homes. Some homeowners have even been tempted to refinance their mortgage repeatedly. As with any financial transaction, the refinancing of a mortgage involves many considerations, and you should understand the risks and benefits of repeatedly refinancing your home.

Why Refinance?

For some, the opportunity to take advantage of a lower interest rate is the reason for refinancing. For others, refinancing allows them to move from an adjustable-rate mortgage to a fixed rate mortgage, which reduces the risk of paying high interest rates in the future.

Refinancing may offer an opportunity to take advantage of your home's increased value or to consolidate debts. A cash-out refinance occurs when a you borrow additional funds during the refinance transaction and use the funds to suit your needs. For example, the you may use the funds to pay for costly home improvements. When refinancing is used for purposes of debt consolidation, the lender pays off some or all of the other debts with the additional funds borrowed during the refinancing transaction.

By doing this, The amount of principal owed increases as a result, but the you may be in a better position overall because the interest rate on a mortgage loan is usually much lower than the interest rate on other types of debts and is often tax deductible.

Before refinancing, whether it's for the first, fourth or fifth time, it's important to ask yourself why you're refinancing, and to carefully examine its costs and benefits.

Buyer Beware

Some homebuyers get caught up with unscrupulous mortgage brokers who regularly contact them with a better deal, encouraging them to refinance. But remember that while mortgage brokers get paid for bringing new clients to the bank, you are ultimately paying the broker's fee in one form or another, even if it's advertised as a "no-fee refinance."

Don't take a mortgage broker or lender's word for it when they tell you that refinancing is a good deal. Examine the numbers yourself, and if you don't understand the math, ask a trusted friend, family member or financial advisor to walk you through the financial analysis of your existing mortgage and the prospective mortgage. Then decide for yourself whether it makes sense to refinance.

Points, fees and closing costs can cut into your total savings. Lenders will offer to roll those costs into your loan (so if you're refinancing $100,000 and the mortgage costs plus points are $2,000, then you'd get a new loan for $102,000). However, it's important to calculate how much extra interest you'll pay over the life of the loan by rolling those costs into your mortgage. It might not seem like much to increase your mortgage by $2,000, but if you refinance five times and roll those costs into each refinance, you've subsequently increased the balance of your loan by $10,000, which is 10% of the amount you originally refinanced.

Pay Attention to Your Credit Report

Each time a lender checks your credit report (performing what is known as a hard inquiry), it temporarily hurts your credit score, which is a general indicator of your overall credit-worthiness. This may make it more difficult to obtain a loan or new credit card in the near future. Only apply for new credit if you are certain that you need it and can use it.

Pay Attention to the Equity in Your Home

If you're repeatedly refinancing to take equity out of your house (in other words, because the lender hands you a check or pays off other debts at closing), you may be living beyond your means, and you're losing some of the benefits of owning real estate.

In addition, when companies review your credit report, they're evaluating how much money you owe, and how much total credit is available to you. If you take equity out of your house with each refinancing, you're increasing the total amount you owe to the lender, which can damage your credit. Finally, if you've taken a lot of equity out of your house and the value of your home decreases (which can happen in a depressed economy), then you may discover that you owe more on your house than it's worth.

Questions for Your Attorney

Before refinancing your home, consider hiring an experienced real estate lawyer to help you review the loan documents and understand what you're signing.

Among the questions to consider asking your attorney:

• Do you have prior experience reviewing loan documents?
• Is there anything in the contract that could cause problems down the road?
• How much do you charge for your services?

Related Resources on Lawyers.com^sm

- Home Evaluation Worksheet
- Financing a House FAQ
- Home Loans and Mortgages
- Real Estate: Selecting a Good Lawyer
- Find a Residential Real Estate Attorney in your area
- Visit our Real Estate message board for more help

Related Web Links

- How Much Home Can You Afford?
- Loan Estimator