by Edgar Frost

Created on: September 20, 2008   Last Updated: February 15, 2010

The economy is in terrible shape. Inflation and energy prices are high, unemployment is rising, and foreclosures are up. What should you do in a situation like this? The first step is to thoroughly examine your finances.

The first step is to take a general look at your finances. Do you have enough cash flow to comfortably cover your monthly bills? The answer to this question determines what you should do next. If you find that you need better monthly cash flow, you might want to consider refinancing your mortgage into a longer term. Doing this would stretch out the term of your mortgage, but would likely reduce your monthly payments, depending on how much equity you have.

If you find that your monthly cash cushion is very comfortable, then you might want to consider refinancing into a shorter term mortgage. For example, if you have 21 years left on your mortgage, you might want to consider getting a 15 year mortgage. Since rates on 15 year mortgages are typically lower than 30 year mortgages, you might be able to trim 6 years off your mortgage and only have a small increase in your monthly payment. That means you will save money in the long run and own your home sooner.

If you find that your monthly cash flow is adequate but not plentiful, then you should consider doing nothing at this time. You may not want to risk making a change that could put you in financial jeopardy. There are plenty of people who refinanced for reasons other than increasing their monthly cash flow, and many of them have lost their homes to foreclosure. Whether you decide to refinance or not, be smart and do plenty of research.

This brings me to another point. If you refinance, borrow what you can afford, and only borrow enough to refinance the balance of your existing loan. The worst thing you can do is refinance your mortgage and take out extra money for a vacation or new car. It will add money to your monthly expenses and delay the amount of time you will need to pay off your home. When it comes to the roof over your family's head, you must be conservative.

Credit is hard to come by right now, but it certainly isn't impossible to obtain. Here are some guidelines to follow. Besides good credit, the bank is going to want to make sure you have equity in your home. If you default, they want to make sure they will be able to recoup their investment, so the more equity you have, the less risky you are to the bank. You should have at least a 10% equity stake in your home, but at least 20% is preferable. The more equity the better. Finally, no more than 35% of your monthly income should be going toward paying debt such as your mortgage, credit cards, and car payments. It's possible to get a loan if you exceed these levels, but you probably won't get great terms.

The important thing to remember is safety. Only refinance your mortgage to reduce your payments or to significantly reduce the term of your loan, and be sure to maintain a monthly payment that is manageable for you. If you manage your mortgage conservatively, your future should be bright.

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