SANTA CRUZ (December 7, 2008) - It is time for homeowners to take another look at their current mortgage(s). The ever-popular 30 year fixed rate mortgages briefly touched below 5 percent this past week for loan amounts under $417,000 and for the most credit-worthy borrowers with lots of equity. Lower home values will preclude many homeowners from being able to take advantage of the current refinance opportunity. Obviously, every homeowner is not going to be able to qualify but it is worth examining.

Saving money and creating money are the two big reasons to refinance. The key as to whether or not refinancing makes sense hinges almost entirely on how long the homeowner will keep his or her loan(s) in place. Reasons such as lowering the interest rate or converting to a fixed rate from an adjustable rate mortgage make sense as long as the costs of refinancing and the projections of future rates of the replaced ARM are accurately estimated. For example, replacing a Home Equity Line of Credit that is tied to Prime Rate with a new fixed rate mortgage may be advisable if there is a large balance that cannot be repaid within a reasonable period of time.

Shortening the term of the mortgage by either replacing a 30 year mortgage with a 15 year mortgage or simply increasing the payments on an existing mortgage will result in the biggest savings of all. Financial planners, however, may recommend other ways (other than paying the mortgage off early) to save and make money like converting the equity to cash and then investing that cash.

There is still nothing wrong with converting equity into cash by refinancing into a larger mortgage as long as that cash is put to good use. Creating cash to remodel or to take advantage of today’s home prices by purchasing a rental property or even to make sound investments in stocks and bonds could all be considered a wise use of equity. A good example of a bad use is to buy a short term asset with cash created from a long term obligation. For example to borrow $30,000 with a 30 year mortgage to buy a car that may last only five years will result in interest charges of $36,000 and payments that last long after the car is gone. It is a good time to consult with a knowledgeable and competent mortgage consultant.

Refinancing to simply take advantage of low interest rates is not always a good idea nor is refinancing in order to create cash necessarily a good idea. Homeowners refinance for a variety of reasons but one mistake that a homeowner can make is to habitually convert equity to cash in order to pay off credit card debt or other short term debt.

Although current rates may be lower than your present rate, many details should be considered before making the decision. A thorough analysis of your current loan, present and future earning capacity, financial goals and long term goals with the property should be done before refinancing (or purchasing a home). Call on the advice of professionals such as accountants, financial planners and mortgage consultants to help with this process.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.