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Is It A Good or Bad Idea To Refinance Your Home? The Pros and Cons of Refinancing
Refinancing can be a good way to lower your monthly mortgage payments, get access to extra cash or consolidate bills that have high interest rates into a lower rate loan. You will need to ask some critical questions before considering refinancing though. A very important question is what is the difference between the current interest rate and the rate you are paying on your mortgage. It will also cost you fees to refinance and these may take several years to recoup even if you save on the interest rate.
Should you refinance your home? Reasons for Refinance:
You may want to lower your monthly payments to have more income left over for other purposes or you may have an adjustable mortgage that you don't feel comfortable with and want to convert it to a fixed rate loan.
You may have college tuition expenses coming up or just wish to pay off high interest credit cards, or perhaps put in a pool or other improvement.
There is a bankers rule of thumb that states that you should probably consider refinancing when the interest rate falls more than two percent below what you are currently financed at. Anything less than two percent won't be enough of a savings to offset the refinance charges, closing costs, origination fees, and so on.
You may save on some of the above costs if the lender is willing to accept the survey, title search, etc from the old loan if the information is still current enough. In that case the two percent rule may be fudged a little since your closing costs will be less.
If you do refinance just remember that you usually add a couple of years to the length of your mortgage. If you have paid on it for two years and refinance you will end up having made payments on 32 years when it is all said and done, instead of 30 years. If the savings are great enough this may be inconsequential.
On the other hand, if you plan on moving, and are
confident that current real estate prices will hold, you might switch from a
fixed loan to an ARM and save a bundle if your closing costs are low enough but
remember you are giving up the security of a fixed interest rate in uncertain
If you are one of those fortunate enough to still have a large amount of equity in your home after the recent downturn in real estate values, you may want to refinance to raise some cash. You should treat this option with the utmost caution and respect since this is where many people have gone wrong and ended up getting on the negative side as values drop. Lenders will often let you borrow up to 75 percent of the appraised value in the form of a home equity loan. You can use home equity loans for any number of reasons, college tuition or home improvements. Home improvement loans that add value to the property are often seen more favorably and can have lower interest rates.
Steer clear of lenders who promise more that one hundred percent home equity loans since these may come at very high interest rates and any amount you borrow over the appraised value of the house is cannot be tax deductible.
If you are considering a home equity loan be aware of the pros and cons and remember that your goal should be to have a paid for home by your retirement years. If taking out a substantial home equity loan means that you will be paying on your home well into our retirement years you should think twice about it.
There are many lenders offering a number of options although standards have become tighter due to the recent collapse of the real estate market in some parts of the country. However, if you do have significant equity and a good credit rating there are still many options for you in terms of refinancing if it is a beneficial choice for you.
By Karen Yates, Tax Preparation Specialist For
The opinions expressed in this article are my own and should not be considered
financial advice. You should talk to a banker or licensed mortgage broker before
making any decision.
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