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Should You Refinance?

Posted by  on Apr 16, 2009
 
Several factors motivate people to refinance their mortgages such as the desire to save money. As a result of the fall of interest rates, most people are curious whether this is a good time to refinance. Because interest rates are falling since the mortgage was taken out you should be aware that refinancing your mortgage will cost you time and money in order to save in the long run. Make sure you have done all the finance calculations you need to in order to fully get what you need out of mortgage. The possibility that you will save money is very good if the interest rate for your current mortgage is high. For instance, if your rate is 1.5% over today's rates, you will probably save money by refinancing.

An ARM is a mortgage on which interest is payable at a rate that varies according to a predetermined formula. The interest is usually tied to a prime rate. If you get one of these, you will probably compare the lifetime caps of your current mortgage to determine if your rate is high enough to refinance. Also, the likelihood of saving money increases the longer you plan to keep the property. The best way to determine if you will benefit by refinancing is to determine how long it will take you to recoup the costs of refinancing.

Refinancing is a great idea for most people, but you should remember that if you decide to do so, you will inevitably lose tax benefits. Interest paid on your mortgage loan is tax deductible, which means that you cannot estimate your recuperation period in this manner. To estimate your period, you will have to know your federal tax rate. Once you know your federal tax rate you will reduce your monthly payment savings by that rate.

Keep in mind that only you know your financial situation and what you are comfortable undertaking. But, as a good rule-of-thumb, if you can recoup your costs within a few years, and do not plan on moving within that time frame, then refinance. If it takes longer to fully recoup your refinancing costs, refinancing may still be in your best interest if you anticipate keeping the property and mortgage for a long time.

If you are considering refinancing, remember that a recuperation period over seven years could be too risky to justify the costs and hassles. Many things can happen in that time frame. It is also possible to find no-cost refinancing or no-point loans. However, these types of mortgages may not be the best long term option, and many have prepayment penalties. Typically, the loans that yield the lowest interest rates require you to pay points.

These may require greater up-front, out-of-pocket expenses, but you will benefit significantly in the long run. Some loans will allow you to amortize your expenses over the term of the loan. Make sure you carefully investigate this option, because it might not provide the greatest benefit and you could be required to pay interest on the amortization. If your overall goal is to simply lower your cash flow, then this may be an option. If you do decide to refinance, make sure you shop around. In addition, check your current mortgage to ensure that you will not be charged a prepayment penalty.

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