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When It Makes Sense to Refinance a Home

To refinance a home, a person needs to understand his or her financial goals, both short and long-term to determine if this would be the right decision. For some people, refinancing is the answer they have been looking for while for others, it simply does not make sense from a financial perspective. After all, when a home is refinanced, a new mortgage loan is taken out to replace the original loan, which means not only going through the application process but also closing to include all applicable fees.

One situation when it would sense to refinance a home would be for long-term savings. As an example, people that have locked into an initial Adjustable Rate Mortgage would have the opportunity to secure an interest rate that would benefit long-term. Although the rate for a Fixed Rate Mortgage would probably be higher than a rate for an Adjustable Rate Mortgage, if the individual planned to stay in the home 10 years or more, then by the time the loan matured, the savings would be significant.

On the flip side, if someone had an initial Fixed Rate Mortgage and planned to remain in the residence for only a year or two, choosing to refinance the home with an Adjustable Rate Mortgage could prove to be the right decision. Currently, housing interest rates are low and while they are likely to increase at some point in time, chances are that rates are going to stay low for several more years. The benefit would be locking into a lower interest rate to enjoy immediate savings and then selling prior to interest rates increasing.

When a person looks to refinance a home based on interest, experts agree that for the new loan to make sense, the homeowner would need to be lock into a rate at least 2% lower than what he or she currently has. In other words, if a person had an 8.5% interest rate on the original mortgage but to refinance the home could get a rate of 6.5% or lower, then it would take little time to recoup the money spent on closing. Therefore, the decision to refinance a home for a scenario like this would certainly be to the homeowner’s advantage.

Sometimes, people will refinance a home to change the terms. In other words, if the individual took out the initial mortgage for 30 years at a time when money was tight, but now that person has been able to build a solid career that produces lucrative income, then the decision to refinance the home for a 15-year mortgage would be worthwhile. Calculating the savings at the time of loan maturity would result in a savings of thousands and thousands of dollars!

Even switching to an interest only loan might justify the decision to refinance a home. This type of loan is unique in that for a specific amount of time, the homeowner would pay only the interest on the loan each month, not the principal. If the homeowner were facing a financial crunch, during the period when the monthly mortgage payment were significantly lower, past due bills, home improvement, purchase of a new car, paying for college expenses, getting medical debt paid off, etc would be possible. Therefore, to refinance a home using an interest only mortgage should be examined carefully and then discussed with a professional lender.

Typically, a homeowner would consider the process to refinance the home if the money spent for the process and closing could be recouped in four to six months. Obviously, with so many possibilities, one of the most important things would be for the homeowner meet with the current mortgage lender, sitting down to go over the numbers. That way, it would be easier to see if the process to refinance the home would make sense or if another solution would be better matched.

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