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Refinancing – Pros and Cons

News | 23rd Jun 2012
There are countless homeowners who have benefited from low interest rates in order to refinance their mortgages. This article is going to present you all the disadvantages and advantages of refinancing.

Before applying for a refinance loan you should bear in mind some essential factors. First of all, it’s wise to get a refinance to reduce a debt. On the other hand, if you want to obtain a refinance to borrow more money for a vacation or a car, the situation might become disastrous. Read the current contract for your mortgage very carefully so as to see if you’ll be charged fees or penalties for closing the loan earlier. Lastly, determine whether you have a variable or fixed rate and see what the terms are.

The basics for home refinancing

Lately, there are increasingly more Americans who are taking advantage of minimized interest rates so as to get a refinance loan for their mortgage. The highest point for the refinancing market was in 2003. The American Association of Mortgage Bankers reported that the refinancing was high in 2005 and 2004 as well.  This type of loan can help individuals minimize the costs for a mortgage. However, not everybody can benefit from this strategy. Thus, before thinking to refinance the mortgage, you must consider some aspects and see if this is the right decision for you.

Refinancing or not?


Refinancing is a smart decision only if it helps you lower the interest rate by a minimum of 2 percentage points; for instance, from 10% to 8%. The most important factor is how long are you going to stay in the home you bought? Thus, ensure you comprehend the time you’ll need to compensate the refinancing cost.

Take this into consideration: you have an interest rate of 8% for a 30 – year mortgage of $200,000. Thus, the monthly payment is $1,468. For a refinanced mortgage, the interest rate would be 6% and the monthly payment $1,199. Monthly saving will be about $269. Considering that the refinanced closing costs are $2,000, the amount of time to break even would be 8 months. In case you’re staying in that home for another 8 months, then this sort of loan is a sensible solution. Refinancing is not an option when you want to sell the house before those 8 months.

Keep in mind that mortgages are created in different ways to suit the needs of every individual. Thus, don’t choose the mortgage taking into consideration only the annual percentage rate.  There are many other variables that you should think about, including points or discount fees, the mortgage term and whether or not the interest rate is variable.

Lastly, you should know that you don’t need to go to a different lender in order to refinance the mortgage. Your current lender can get for you a cheap and easy refinance, because he is aware of all your financial information. So, your application will be processed with less resources and time. However, in order to make a confident and informed decision, you have to discuss with your lender thoroughly, ask questions, crunch the numbers, and shop around to obtain the best refinance loan.

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