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Refinancing: A Renaissance in Your Pocketbook

Posted by  on Apr 16, 2009
 
Interest rates are low, lower than historical precedent. This is one perfect reason to refinance. But there are lots of reasons you might want to refinance. One of the main reasons homeowners refinance their mortgages is to take advantage of lower interest rates. If rates have lowered since the time of your original mortgage you may refinance your mortgage at a better rate and therefore reduce your monthly payments. You may opt to refinance as a source of obtaining money at a low interest rate.

Another reason to refinance is to switch to an adjustable rate mortgage with high or no limits on interest rate increases to a fixed rate mortgage which provides the predictability of knowing exactly what your mortgage payment will be for the life of the loan.

Before you refinance, it is important to determine the best type of a new mortgage. The type of mortgage loan you select will depend on how long you expect to continue living in your current home and the amount of monthly payment you can comfortably afford.

An Adjustable Rate Mortgage traditionally offers lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years.

If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. You can start to consider 15- or 30-year fixed rate mortgages if you plan to stay in your home for more than seven years.

In reality, 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. The refinancing process will remind you of what you went through in obtaining the original mortgage.

To figure out whether it pays to refinance, you must calculate the total refinancing costs and answer the question that may help you decide: How many months will it take to break-even? You should consider refinancing if you plan to stay in your home for more than the time it takes to break-even.

It may not always be a good idea to refinance. The greatest deterrent to refinancing could be a prepayment penalty on your present mortgage. The practice of charging money for an early pay-off of the existing mortgage loan varies by state, type of lender, and type of loan. Laws in many states prohibit or limit mortgage prepayment penalties. The mortgage documents for your existing loan will state if there is a penalty for prepayment.

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