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When To Refinance
When should you refinance?
There are a number of factors to consider when deciding when to refinance your home. While some online websites or a loan officers can make refinancing seem like a "no brainer", you should not sign up for a new mortgage without thinking about your lifestyle and your future.
When to refinance: When you can lower your mortgage payment.
If you can lower your mortgage interest rate by a percentage point, you'll save $8.33 for every $10,000 of your mortgage.
Suppose your current mortgage balance is $120,000 at 7.5%. And suppose you can get a 6.5% mortgage refinance loan. Since you will refinance 12 x $10,000, you will save 12 x $8.33 or about $100.00 on your first payment. The savings for subsequent payments will be a bit less since your mortgage balance is decreasing.
Don't forget that refinancing is not free. You will need to pay various fees for items such as "points", loan origination, your attorney, inspector, appraiser, title search, and so on. If you are planning to sell your home in a few years, these fees could add up to more than you would save during the time you own your home.
Once you add up both the monthly savings and the up front costs, you may find that the mortgage refinance loan doesn't look so good after all.
When to Refinance: When you can pay off high interest credit card debt.
You may have some additional equity in your home due to it's appreciation. This may allow you to refinance for more than you currently owe.
You can use this extra money to pay off high interest credit card debt or other debts. Because you have eliminated high interest debt, you will additionally save because you won't be making those payments.
When to Refinance: When you credit rating is good.
The interest rate you can get for your mortgage refinance loan is partly determined by your credit rating. Credit grantors use your credit rating to determine how much trust they can place in you to pay back your loans. The better your credit rating the more likely you are to make on time payments and the better interest rate you can get. If your credit rating is not so good, credit grantors will see you as a high risk borrower and will loan money at higher rates.
If you pay your bills on time, don't have too much credit card debt, and haven't applied for multiple credit accounts recently your credit rating should be pretty good.
When Not to Refinance: To cover up a spending problem.
Yes, you can pay off high interest credit card debt when you refinance for more than your current mortgage balance.
But, this can give you a false sense of security. Unless you reform your spending habits you'll soon be in the same position, with lots of high interest credit card debt. But, you'll be worse off since you may not be able to "refinance" that debt away.
Your best option is to get some credit counseling help. You can start by reading my free credit card debt ebook.
You will be well rewarded by using a mortgage refinance loan in conjunction with credit counseling to eliminate both your high interest debt and your excessive spending habits.
Additional Resources
Home Mortgage
30 Year Fixed Rate Mortgage
Interest Only Mortgage
Bi-Weekly Mortgage
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