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Refinancing Your Home
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Refinancing Your Home

Home refinancing Many Americans have decided to refinance their homes in recent years, and they are doing so with increased frequency. Refinancing is really nothing more than establishing a new mortgage contract with terms that you think will be more beneficial to your personal needs.

There are many good reasons for setting up a new mortgage contract on your existing home, but it is important to carefully analyze the new contract terms and to make sure that there will indeed be a long-term benefit. Here are some common reasons why people decide to refinance a mortgage.

Reducing Interest Costs

If the interest rates in the U.S. have fallen below the rates of a personís original mortgage, it often pays to refinance the house with a new contract based on the lower rates. By doing this, a home owner might save thousands of dollars.

Letís imagine that your original house loan was $100,000 and the interest rate on that loan was fixed at eight percent per year for 30 years. And letís assume that you paid mortgage payments for three years. During that three year period, changes in the economy lowered interest rates to 6.5 percent, a reduction of 1.5 percent. In this case, refinancing the loan under the lower interest rates could save about $1,000 per year. That would translate into either lower monthly payments or a reduction in the repayment schedule. Lock in a Fixed Interest Rate Some people refinance homes in order to switch from a variable (or adjustable) rate mortgage (ARM) to a fixed-rate mortgage. Under an ARM, interest rates go up and down with the economy. And as a result, so do mortgage payments. A home owner might want to establish a more predictable future with a fixed-rate loan, to know exactly what their monthly payments will be until the loan is paid in full. Or they might believe that higher interest rates are on the horizon of the U.S. economy. In this case, the home owner can switch to a fixed-rate loan and escape the higher rates that he or she might experience in the future.

Extend the Repayment Schedule

Many people choose to refinance home loans in order to extend the repayment schedule. For example, if a person has lost income or has experienced higher expenses, he or she may need to reduce the cost of monthly house payments. By establishing a new mortgage that adds 10 more years to the life of the loan, this personís monthly payments will be lower. The downside of this, however, is that the overall cost of the home will increase. Even if the interest rate stays the same, the person will pay interest for more years.

Pay Off a Mortgage Faster

Other people seek refinancing in order to shorten the length of a mortgage repayment schedule. If a person finds that their income has increased and they can now afford higher monthly payments, decreasing the length of the loan can save thousands of dollars in interest costs.

Consider the following example of a person who has a $150,000 home loan with an interest rate of 7.5 percent and 30 years to pay it back. The monthly payment under this plan would be about $1050. The total cost of the house at the end of 30 years would be more than $377,000. If the person reduced the pay-off time to 15 years, the house payment would increase to about $1400, or about $350 more per month. But watch what happens to the overall cost of the house: it drops to about $250,000. This person would save more than $127,000 in interest costs! The above example shows how this approach to refinancing can be a means of forcing yourself to save; you will have to obey the new terms of the loan. But, if you are disciplined with money, there is no reason why you canít simply maintain the same 30-year mortgage terms and then pay more than what is required each month.

Precautions

These are all good reasons to refinance a home, but there are some important factors to consider before making a final decision. Whenever you enter a new mortgage agreement, you will have to pay many fees for things like mortgage processing and closing costs. These fees can run as high as $4,000, depending on the size of your loan. In addition, some lenders will charge you a penalty for paying off your original loan early.

A lender might offer you a "no-cost" refinancing plan, leading you to believe that you wonít pay many of these fees. But in most cases these costs are imbedded in your interest rate and overall loan. You just donít see these costs up front.

It is usually helpful to talk with a financial advisor, not your mortgage lender, before you make a decision.

Author: Glenn McMahan


 



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Refinancing Your Home