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When Is Home Refinancing The Right Decision?

Todays Date: September 23, 2018

Homeowners it seems are forever on the lookout for ways to cut down on their bills. And home refinancing has become the method of choice for many. But be careful before you jump into any deal. There are times when refinancing can end up costing you more than you save on your monthly bills. Let’s begin by examining when a new loan makes sense.

Start by looking carefully at your current loan. Do you have an adjustable rate? If so you may end up saving money by locking in a low fixed rate. The only time an adjustable rate is good is if you get the loan when rates are high. Having or getting one now however, with rates the way they are, is probably not a wise choice. Shifting to a low fixed rate can save you thousands over the course of the loan. Make no mistake, the rates will go back up eventually. That’s not a prediction, just a fact that rates change. When they do go up, it won’t bother you because you’ll be locked in at a great rate.

Another good time to refinance is if you have a balloon payment that will be due soon, and you simply don’t have the funds available. Finally, if your current mortgage has a rate higher than the current market, then seriously look into refinancing. Even a savings of 0.25% can make a huge difference over the course of a 30 year loan.

Of course that all sound great but naturally there are some things to look out for as well. Carefully examine the closing costs. Refinancing is not free and some of the costs associated with it can be pretty significant. Once you know the costs, do some figuring to determine how long it will take to to recover that money from the savings you see each month.

The reason this is so important is because people rarely stay in one house for the duration of their loan. If moving is something you might be doing in the near future, you’re simply giving away money. You should be reasonably sure you’ll be in your current house at least long enough to make up what you spend in closing costs.

Also determine if your new loan has a pre-payment penalty. Most of them will, at an average cost of 2-5 years. This can hurt your bank account in two ways. Again if you are moving and will be taking out a new loan, or if you simply decide you want to pay it off early. Either way, you have to consider the money you will spend in penalties and compare it to how much you are saving monthly.

Of course the most obvious thing to look at is your monthly payment. Many people choose a cash out option when refinancing. This means money in your pocket now, but it also means a higher balance on your loan. Even if your interest rate goes down, it is conceivable that your monthly payment will actually go up. The best situation is to get a rate significantly lower while using a cash out option. This means money now and lower payments, even with a higher balance.

Home refinancing can be a great way to cut down on your monthly expenses, and also give you some spending money if you need it. But doing it at the wrong time and under the wrong conditions can cost you money that we’re sure you don’t want to give away. Always check your savings against any fees and penalties, as well as other factors such as a potential move. If everything checks out in your favor, don’t just go with the first offer you receive. Shop around. You’ll be surprised at the difference in rates in terms that exist. And get recommendations from friends and relatives as well.

Good decisions can be extremely beneficial to your financial well being.

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