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Lower interest rates may have caught your eye recently. If you’re considering a mortgage refinance you should think about your own personal finances in addition to interest rates. Although mortgage refinances can sometimes save you money, there are certain instances when a refinance may not be the most cost-effective way to go.

You should always consider the market, the potential value of your home, the amount of equity you have as well as your own personal finances before going down the road of refinancing. Here are a few things to think about before you start the refinancing process.

Equity in your home

When you’re going through a home refinance, the first thing lenders look at is the equity in your home. Since the recession, many homes that were previously underwater have come up in value. Property prices have also risen significantly in recent years. With fewer properties available for sale, it’s very much a seller’s market right now. This will definitely play to your favor when it comes to refinancing time.

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If you don’t have at least 20% equity in your home, however, you’re going to have a more difficult time refinancing. If you’re going to try to refinance without any equity, you may not be able to with traditional lenders. Government programs may be able to assist in some cases.

Your credit and debt standing

Your own finances are one of the most important factors to consider before you head down the road of refinancing. Your credit score and the amount of debt you have will be one of the first things lenders look at. Lending standards have risen in recent years so it may be tougher to get a new loan than it was when you originally got your mortgage.

Lenders want to make sure your mortgage payments are less than 28% of your income and you should have a debt-to-income ratio of under 36%. It’s always a good idea to pay off some debt before you apply for a refinance. The more you can pay down the better to lower the amount of debt you have. Not only will this better help you qualify, but you will also receive lower interest rates.


Although you may save money on interest by refinancing, there will always be some costs associated with the loan and process. According to, it will cost you about 2%-3% of your overall loan amount to refinance. You may be able to obtain a loan without paying closing costs but your interest rates will typically be higher because of this.

You should also consider what you are trying to achieve through your refinance to better gauge the costs. When your interest rate is lower and you have a longer term, your payments should go down. If this is your goal, go for a longer term. If your goal is to pay off your mortgage faster, you’ll want a shorter term. Your monthly payments may increase but your interest rate should go down with the refinance.

Another cost to be mindful of is private mortgage insurance or PMI. If you have less than 20% in equity, you will have to pay private mortgage insurance. If you’re already paying this, you won’t see a difference but if the value of your home has dropped, you may end up paying more if you have to add on the cost of private mortgage insurance. You and your lender can do the quick math here to see what is more cost effective.


The interest you have been paying on your mortgage is often used as a deduction at tax time. After you refinance, however, you may be paying less interest and therefore will have less to deduct at the end of the year. Depending on your tax bracket and how much your interest is going down, do the math and see if the deduction or the refinance will be better for you financially.