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Is Refinancing Risky Business?

Posted by  on Apr 16, 2009
 
Many homeowners were lucky enough to buy their home while mortgage rates were very low. If this includes you, you may have no interest in refinancing your present loan. But perhaps you bought your home when rates were higher. Or perhaps you have an adjustable rate loan and would like to obtain different terms. If you fall into the later category, you may consider refinancing.

Determining whether or not to finance is a difficult process. If you do refinance, the process will remind you of what you went through in obtaining the original mortgage. Refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around.

Refinancing may not be for everyone. Refinancing generally becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

Refinancing involves many considerations, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing.

Many people who do wish to refinance their home mortgage want to get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile. Likewise, if you have an adjustable rate mortgage and want a fixed rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.

In addition, if you want to convert to an adjustable rate mortgage with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have, refinancing may be a good idea.

Furthermore, if you want to build up equity more quickly by converting to a loan with a shorter term or wish to draw on the equity built up in their, refinancing is a great option. If you decide that a refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing.

If you are considering refinancing your home mortgage you should consider a few more things, in addition. Is the next interest rate adjustment on your existing loan likely to increase your monthly payments substantially? Will the new interest rate be two or three percentage points higher than the prevailing rates being offered for either fixed rate loans or other ARMs? Think through the pros and cons carefully before making a final decision.

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