Refinancing Solutions

Posted by  on Apr 16, 2009
Some people are good candidates for refinancing, while others are not. This largley depends on one’s situation and what their financial goals consist of. If there is an individual who wants to lower their interest rate or monthly payment, they should ask themselves some questions. These include how long you expect to be in your home, how much equity do you have in your home, and if you are willing to pay points to get a lower rate, and will having lower payments more than make up for the closing costs.

The interest rate you pay on a cash-out refinance loan will most likely be the same as what you pay on a mortgage in a situation that does not involve taking cash out. There can also be incremental fees associated with a cash-out refinance. Using the equity in your home to pay off other bills can be smart. Consider taking some money out to pay off high-interest credit cards bills, auto loans and any other debts you have that have non-tax-deductible interest. Please consult your tax advisor to find out whether you may be able to deduct the interest on your new loan.

Historically, rates rise faster than they come down. If you are thinking about buying a home or refinancing your mortgage, lock in your rate now, you can always refinance later if rates drop again. Any near-future drop in interest rates may not be drastic enough to impact your monthly mortgage payment. Of course, every situation is different, so it is important to consider all of your options.

If you are thinking about refinancing, it is usually a good idea to get the lowest fixed rate possible, but you also have to consider your situation. If you are in the first year of an adjustable rate mortgage and you plan to move in three years, refinancing is not a good idea. If the rate on your ARM is about to adjust and you think the rate will go up, it could make sense to get a long-term fixed-rate mortgage, especially if you don't plan on moving in the next seven years.

Paying points may or may not be your best option, depending on what you are doing. Points paid on a loan you have refinanced can be deducted from your taxes only in small increments. It could therefore be several years before your lower rate makes up for the points. However, if you are buying a home, points paid are a tax-deductible expense for that year.

Remember that there are few loans that truly have no closing costs. Sometimes lenders may not charge application fees and agree to pay the appraisal and title fees, but they may increase the interest rate in return. Lenders can also roll the costs into the amount of your loan. Therefore, because you are not paying costs up front, it has called a no closing cost loan. While slightly increasing your mortgage might be acceptable to you, it is not cost-free.


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