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Is Now a Good Time to Think about Home Refinancing?


On the surface, home refinancing can seem to offer innumerable advantages to homeowners. If you are considering refinancing your home; however, you should consider whether now is the right time for you to approach refinancing. Timing to reap the most benefits from refinancing is partially dependent on the current market and economy; however, it is also dependent on your own personal situation.

The general rule of thumb states that it is a good idea to consider refinancing your home when interest rates are approximately two percent lower than the prevailing interest rate on your current mortgage. This benchmark took into consideration the costs associated with refinancing your mortgage such as credit reports, application fees, fees for 'points', a title search and a sundry of other costs that can create a hefty bill for refinancing.

In today's market; however, the so called 2% rule may no longer be as effective at gauging whether now is a good time for you to consider refinancing. Currently, interest rates have reached a low point that have not been seen in many, many years. In addition, the balances for consumer credit have escalated considerably. As a result, it could actually make more sense for your refinance even if your mortgage is less than 2% higher in terms of interest rates than the current rates.

The main areas to focus on when determining whether now is a good time for you to refinance is to consider how much you could save each month by refinancing, how much it would cost you to refinance and how long it would be before you could recover the cost of refinancing.

Let's say you have a $200,000 fixed rate mortgage with a 7% interest rate. With principal and interest, you would be paying about $1,330 per month. If you could obtain that same mortgage at a rate that was just one percent smaller, your mortgage payments would drop to $1199 per month. That is a savings of $131 per month.

Now, let us say that you were able to obtain the new loan without purchasing any points and your closing costs amounted to $2,500. It would take a little over a year and a half to recover the cost of refinancing.

You should also take into consideration whether you could benefit from switching from a fixed rate mortgage to an adjustable rate mortgage. In most cases this is not a good option because you run the risk of changing from a solid fixed rate mortgage to an interest rate that could fluctuate. If; however, you are thinking of selling your home in the next couple of years, the opportunity to take advantage of the initial lower rates that typically come with adjustable rate mortgages can be quite advantageous.

Many homeowners also consider the possibility of refinancing from an adjustable rate mortgage to a fixed rate mortgage. The main attraction here is going from a mortgage that can fluctuate to one that is locked in. Typically, this is a good option for most homeowners because they can eliminate the worry that their mortgage payments may rise over time. In some cases; however, it may not be a good idea. For example, if you think you might be moving in a few years, you may find that it really is not advantageous to refinance out of your adjustable rate mortgage because you may not have a chance to recoup the cost of the refinance.

With any refinancing strategy; however, you must make sure you take into consideration all of the possible caveats. For example, it is not uncommon to find that a lender is willing to refinance you mortgage with no out of pocket expenses. Keep in mind that this typically does not mean that you will not have to pay for your refinance. Generally, it just means that the costs of refinancing will be added back into the mortgage. As a result, you will certainly pay for the cost of refinancing your mortgage and you will also pay interest for it over the long term.

Caution should also be exercised when considering refinancing as an option to pay off consumer debt or pay for college. While refinancing is certainly an option to fund those situations, it is important to keep in mind that you will actually be spreading out those payments over a longer period of time. This means that ultimately you will be paying more as interest adds up over the long term.

With any refinancing strategy there are going to be certain caveats. The key is to analyze your situation, current rates and determine whether refinancing now would make the most sense for you over the long term. If you think there are great benefits to refinancing your home to take advantage of the low interest rate, click here to get custom refinancing rate quotes from up to 4 local and nationally-recognized lenders here.


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