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The Good, the Bad and the Ugly of Home Refinancing

In the last few years, more and more homeowners have taken advantage of the opportunity to refinance their mortgages and achieve lower interest rates as well as lower mortgage payments. When considering home refinancing it is important to recognize that while there are numerous advantages there are also possible pitfalls that should be taken into consideration.

Before you begin the actual refinance process, it is important to keep in mind that you should fully understand the terms of your existing mortgage. Much of whether refinancing now is a good opportunity or not hinges on the terms of that mortgage. If you are not sure whether your mortgage is adjustable or fixed and whether there are any penalties associated with terminating the loan early, it is imperative to find out before you begin refinancing.

You should also understand the basics of refinancing. While it is true that refinancing will allow you to often achieve a lower interest rate there are "catches" to every situation that might mean now is not the right time for you to refinance and reap the most benefits. In addition, remember that refinancing costs money. Just as there were fees associated with your existing mortgage there will be fees for refinancing. While there are innumerable lenders who take pride in advertising that you pay no out of pocket expenses when you refinance with them, this is usually not the case. You may not pay the fees out of your pocket at the time you refinance, but you will pay them. They are typically added back into your mortgage. This means that you will be paying for the cost of refinancing your mortgage each and every month that you pay your mortgage. In addition, interest will be added to that cost just as it is to the principle of your loan amount. Over the long term, it could be more beneficial to simply pony up the cost of the refinance. After all, it is cheaper to pay $3,000 up front than to finance $3,000 over a period of 30 years at a 6% interest rate. Under those terms, you would be paying almost $3,500 just to finance those $3,000 in refinance costs; bumping your total cost of refinancing to more than $6,000.

Take into consideration how long it will take you to break even when you refinance. If you will be saving $100 every month by refinancing but it costs you $2000 to refinance, then it will take you almost two years to break even. It is great only if you plan to stay in your home longer than. Otherwise, it would really not make sense for you to refinance at the current time.

Also make sure that you research all of the mortgage options available to you. Not all mortgages are the same. The worse mistake you can make is to choose a mortgage based on the annual percentage rate. You should also take into consideration the term of the mortgage, whether the interest rate is variable and whether there are any points, discount fees or origination fees charged when you close the mortgage.

Typically it is only advantageous to change from a fixed rate to an adjustable rate mortgage when you will not be in the home for very long and you will be able to take advantage of the initial lower interest rates of the adjustable mortgage. With that in mind; however, you must also consider the break even point. If it takes you two years to break even on the new mortgage and you plan to move in two years, you really have not gained much by switching from a fixed rate mortgage to a lower rate mortgage unless you think you can make money on the sale of the home to deflect the cost of the refinance.

Shopping around for a new mortgage lender can provide some advantages; however, you may also find that your existing lender may make it easier as well as less expensive to refinance. To determine which lender is able to offer you the best deal by conducting a thorough cost assessment.

In either case, make sure you read the entire new mortgage contract before you sign it. Do not allow yourself to be rushed and if you find that you have questions do not be afraid to stop the process and get the answers you need before you proceed.

Ideally, you should only refinance when you determine that over the long term, the savings you would earn by refinancing would be more than the initial expenses of refinancing. 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 nationally-recognized lenders here.



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