Whether to refinance depends on your goals

REAL ESTATE MAILBAG

December 12, 1993

QUESTION: My wife and I hold a 30-year fixed-rate mortgage at 8.75 percent with a balance of $120,000, and 25 years left on our mortgage. Our house is currently worth $185,000. We probably want to buy a new house in three or four years. Should we refinance now?

ANSWER: You should think about refinancing again. Most mortgage lenders have a menu of mortgage programs -- including "no cost" mortgages that could fit your situation. Although rates have gone up over the past few months, they are still low.

In your situation, you could get a 30-year fixed no-cost loan -- with no out-of-pocket costs -- for about 7.50 percent, or about 1.25 percentage points less than your current rate. With $120,000 financed, that would save about $100 per month in mortgage payments.

When considering whether to refinance, you should think about three issues:

1. How long do you intend to stay in your present home? If the answer is two years or less, then you probably should not refinance. You will need to make the calculations based on the amount it will cost to refinance vs. the amount you will save in interest over the new mortgage term.

2. What are your primary objectives in refinancing? Do you want to reduce the loan term -- and pay off the mortgage sooner -- or do you want to reduce your monthly payments?

3. Do you want a fixed-rate mortgage or an adjustable-rate mortgage, or ARM? Many younger homebuyers, who expect to move in the next few years, choose an adjustable mortgage because rates are usually lower. Families that expect to stay put for a while -- five years or more -- usually choose fixed-rate mortgages because these people have less tolerance for risk.

Assuming that you intend to stay in your home for a while, consider a 15-year fixed-rate mortgage -- or another term shorter than 30 years. This will increase your payments, but reduce the interest you will pay.

Remember, there is no perfect mortgage for everyone -- and no solid answer to whether you should refinance. Every family must do the math to see how the numbers work out.

And always shop around for the best rates and terms -- they vary from lender to lender.

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