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Should you Refinance?

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Mortgage Refinance?

                                                                                       
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As throngs of homeowners who have refinanced lately can attest, low interest rates and soaring home values can provide powerful financial benefits. It couldn't come at a better time for investors stung by stock market losses over the past year.

Mortgage interest rates appear to have bottomed in March, but rates haven't bumped up much. Housing economists expect stability for months to come. So there are still good reasons to consider refinancing. Among them:

• Cheap borrowing. You can tap home equity by refinancing for more than what you owe now, taking the difference in cash. Or you can keep your mortgage and get a home-equity loan or line of credit. Interest rates vary depending on which you choose.

Either way, it's a good deal. Because mortgage interest is tax deductible, a nominal borrowing rate of 7.5% would be about 5.4% after taxes for someone in the 28% tax bracket.

• Investment flexibility. Buy time to wait for the stock market to recover. Rather than selling that stock or mutual fund at a fire-sale price next time you need cash, you can borrow against home equity.

A home-equity loan also can be a handy source of capital for diversifying a securities portfolio. The trick is to find an investment with reasonable prospects for returning more than you're spending to borrow against your house.

• Reduced monthly expenses. Increased home equity means you can roll several debts into one refinanced mortgage at a reduced monthly payment.

And the higher equity that comes from rising home values is allowing some homeowners to shed private mortgage insurance, which kicks in when a home buyer makes an initial down payment of less than 20% of the purchase price.

Economic conditions — rising home values, low mortgage interest rates and a scary stock market — create opportunity for smart financial plays. Then again, the wrong move could set you back. Consider:

Pay off the mortgage early

The stock market has rallied in recent weeks, but the carnage from the last year has left even the most optimistic investors queasy. Big losses taken on once-promising stocks have many wondering if their house, which has been gaining value nicely, might not be a better place for their money.

So why not pull back from your stock investing plan and use the money to pay off your mortgage quicker?

In addition to eliminating your house payment earlier, accelerated payments save a huge amount of interest. Example: An extra house payment each year on a $200,000 mortgage at 7.5% will save $76,000 in interest payments. It'll also reduce by 30 years to 23 years the time needed to retire the loan.

Nancy Flint-Budde, a certified financial planner in Clifton Park, N.Y., says most people are better off not accelerating their mortgage pay-off schedule if it means altering their normal saving pattern. Consider:

• Retirement. Never accelerate mortgage payments until you've provided for retirement savings, Flint-Budde says. It's important to take advantage of employer-sponsored plans that provide a match.

• Liquidity. The extra spending needed to achieve free-and-clear home ownership could squeeze your budget so hard that it could just force additional borrowing in the future.

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