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The glass slipper of refinancing

Posted by  on Apr 16, 2009
 
Everybody dreams of finding the lowest rates when refinancing their mortgage. But the Fairy Godmother is not always on top of her game. Luckily, there are other ways of finding the perfect fit and still getting a decent deal on low rates.

Homeowners trying to refinance in the "off-season" of low interest rates often feel like they are stuck in the attic with no chance of making it to the ball. Rates are a tricky business. They lull around spending a hefty amount of time at low costs, sometimes even record lows, and within days can increase dramatically. This causes a stir because generally no one is looking to settle any scores and refinance if there is potential for lower interest rates. However, this is risky because when rates increase and everyone is rushing to close out, those few unfortunate ones that sat out during PE class cannot get in fast enough to refinance and save themselves, or their money.

This is not to say that everyone is going to rush around when interest rates go up. There are the clever ones that don?t act immediately on impulse and hesitate long enough to realize that one drop in rates may not be the end. So the question remains: When is it good to refinance?

Refinancing is the way to go if there is potential for lower monthly payments and recover the closing cost before moving or refinancing again. The number of months it takes to recover the cost is the amount of the refinance divided by the monthly savings. Knowing this helps to determine which rates are best for refinancing. As appealing as a lower monthly rate sounds if it's too close to call, it might be best to wait for a lower rate.

Many people looking to refinance switch from 30-year mortgages to 15-year mortgages which gives the interest rates about a half point break. But be weary, a lower interest rate cuts on the interest throughout the life of the loan, but the monthly costs are higher. When deciding which to chose, either one could potentially be more beneficial. Many believe that those refinancing with the longer loan will come out ahead (if the difference is invested), whereas the shorter-term loan may be beneficial for those trying to enjoy their retirement worry-free.

And then there are the select few that still have an adjustable-rate mortgage. There is still time to refinance into a fixed-rate loan. The ARM has a lot of charm and will be low for the first year. But come time for the New Year, it could have risen up to two points. That could very well be as high as the 30-year mortgage fixed-rate.

Finally, when refinancing, many take into consideration the no-point loan. This is considered because the paid interest is not immediately tax-deductible as is on a home loan. They are deducted over the life of the loan. But here?s the catch: when looking at the new loan balance, there is an added fee for the refinance. If not, then the interest rate will be slightly higher.

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