Refinancing your mortgage: The bailout hits home

News of plummeting mortgage rates may have you wondering whether you should refinance your mortgage. It is probably worth considering, especially if you have an adjustable-rate mortgage or a home equity line of credit. Refinancing into a low, fixed rate--if you can do so--will not only save you money, it will strengthen your overall financial position. But before you rush out to talk with your mortgage broker, there are some important questions to consider:

1. How will my credit score affect my ability to refinance? People with good FICO scores (anything above 680) shouldn't have any trouble getting a mortgage, but the days of easy money for those with poor credit are over. If you want information on how your FICO score will affect your mortgage, the Fair Isaac website has a page that updates frequently with mortgage rates by FICO score range. The folks at BankRate.com also have a good website that explains how credit scores affect mortgage refinancing.

2. Do I have enough equity in my home to make refinancing possible? Most mortgage lenders now require at least 10% equity to finance a personal residence. Refinancing investment property typically requires 20% equity or more.

3. Do I want to change the term of my mortgage? The monthly payment on a 30 year fixed rate mortgage will be less than the monthly payment on a 15 year fixed rate mortgage with the same interest rate. For example, if I were borrowing $250,000 for 30 years at a 5% interest rate, my monthly payment would be $1,342.05. If the maturity of that mortgage were 15 years instead of 30, the monthly payment would be $1,976.98.

4. Will refinancing save me money? Chances are today's low rates will save you some money, but whether or not the savings is enough to justify the expense involved requires some number crunching. The BankRate.com site has a tool that will do the heavy lifting for you and will even tell you the months required to break even.

There may be some other considerations to keep in mind as you weigh whether or not to refinance, but the lower rates being engineered by the Federal Reserve are a unique opportunity for most homeowners. My wife and I went through this analysis today and discovered that we can lower our monthly payment by several hundred dollars on a mortgage balance of $250k and moving from a 15 year fixed rate at 5.25% to a 30 year fixed rate at 4.875%.