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5
Reasons To Consider Refinancing...
No one but you can determine
if refinancing will be a smart financial move, but here are some of the most
common reasons people choose this option.
1.Interest rates have dropped below your current mortgage rate,
and you want to lower your monthly payment. Keep in mind, if you plan to
stay in your home for a relatively long time, the decrease in your monthly
payment will help offset the costs associated with refinancing.
2.You want to lower the
total cost of your loan by reducing the term. For example, if your
current mortgage rate was 10.25% for 30 years and you refinanced at 8.25%
for 15 years, your monthly payments might increase a small amount, but you
would save tens of thousands of dollars on total interest over the course of
the mortgage.
3.You have an Adjustable Rate Mortgage (ARM) that is about to go up
and you want to lock in at a fixed rate. (Some ARM's come with a no-charge,
lock-in feature; if yours doesn't, you may have to refinance to get a fixed
rate.)
4.You want an Adjustable Rate Mortgage (ARM) with better features
than your current loan. Know the caps, or limits on the amount your
interest rate or monthly payments can increase. You should also look at the
indices that determine your overall rate. As the mortgage market changes it
may be time to move to an ARM with more
flexible features.
5.You want to consolidate debt. If you have built enough
equity in your home, you might want to combine a home equity loan with your
original mortgage and have one manageable payment. Or you might want to wipe
out some other higher-interest debt, such as credit and charge card
balances or installment loans
The
2% Rule...
The basic rule of thumb for refinancing is that interest rates should
be at least 2% below the rate of your existing mortgage.
Otherwise, your monthly payment won't be reduced enough to makeup for the up
front costs of refinancing. But every scenario is different, and there could
certainly be some scenarios where even a 1% difference in interest rates
would warrant refinancing. These might include a special low-cost
refinancing package or a plan to stay in your home for many years. For
example:
Let's say you are refinancing a $100,000 loan balance.
Your current interest rate is 10%. And your current monthly principal and
interest payment is $877.
You want to refinance at 8%. Your new monthly principal and interest payment
would be $734.
In this example, your payments would go down by $143 per month...making your
total annual savings about $1,716.
Let's assume the cost of refinancing will be about $3,000. You would only
have to remain in the house for 20 months to recoup the costs associated
with refinancing.
What
is Refinancing?...
Let's clarify what
refinancing means... Refinancing is not a process of changing or adjusting
your existing mortgage. It's the process of taking out a new mortgage and
using the money to pay off your current mortgage.
To refinance is to start the loan process over, which means you will be
asked to make an application and then undergo a credit check, title search,
appraisal, inspection and so on. You will incur closing costs just like the
first time around.
Depending on your situation, a large portion of these costs can be wrapped
into the mortgage, so you don't have to lay out a lot of cash up front. But
before we get into costs, let's get back to the original question: to
refinance or not?
Questions about refinancing? Contact us at 407-648-2707 for all the
details.
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