How Do I Determine If It Is Beneficial to Refinance?
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Written by: marciafreeman
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Date: Sat, 20 Dec 2008 |
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Refinancing a mortgage can save you money, but make sure you carefully examine and calculate all potential costs and savings before you sign on the dotted line. A refinance essentially trades in your old mortgage for a new one. Borrowers typically refinance to obtain a lower interest rate or change the term on the original loan. Term is the length of time before the loan is paid (such as 15 or 30 years). The Lender will examine your credit and your home will undergo the same appraisal process as when you purchased your house and applied for the original mortgage. The home appraisal allows the lender to assess the value of the property now. Your credit score and credit report will be requested, as well as any information on additional mortgages on the home. If approved for the new mortgage, you may go through the same process you did when you bought the house, but there is often less paperwork with a refinance. When you refinance, the new loan will be used to pay off the old mortgage and any additional loans against the house. You will be responsible for all fees for titling, preparation of documents, lawyer costs, etc., just like you were when you received the original mortgage.
Most homeowners who refinance choose to do so because interest rates have decreased significantly compared to the current mortgage. When deciding if you should refinance your mortgage, you should first determine the savings you would incur over the life of the loan by using the old interest rate versus the new. Then, compute the cost of the fees and expenses incurred by applying for and obtaining the new mortgage. Make sure you include any penalty fees for paying off the original loan early, if applicable. Finally, try to estimate the duration you expect to keep the mortgage. If the interest rate for your original loan is 7.5 percent and the rates have now dropped to 5 percent, a refinance could add up to tens of thousands of dollars by the time you sell the house. If the fees to refinance will only cost $1000, for example, it would be worth it. If you plan to sell in two years, though, it may not be worth the cost of the refinance.
The refinance of a mortgage can lower your monthly mortgage payments, making it easier to make those payments on time. Your credit rating will be maintained, since you will not miss payments. Before jumping into any refinance, do the calculations to see if the savings over the time you plan to hold the mortgage will be greater than the costs of the refinance.
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