Refinancing Explained For Noobs

Refinancing your mortgage or any loan is just restructuring your present loan and restarting the length of the loan. Seeing the chance to refinance your loan at a lower rate may look great, but it is best to think the whole thing through before making a decision.

One reason to refinance is to get a lower interest rate, thus paying less interest over the years and shortening the length of time you must pay on the mortgage.

Another reason to refinance is to consolidate your debt. You are not getting out of debt just moving some of it over to your mortgage. Some people have an adjustable rate of interest on their mortgage, and they want to get a fixed rate so they don’t have to worry about how much the rate will go up.

Here are a few things you should know about refinancing. There are points and closing costs to be paid with a refinance. One point equals 1% of the amount of your loan so know how many points they are going to charge you to refinance your loan. Closing costs include things like credit report fee, title search fee, appraisal fee, attorney’s fees and loan origination fees. Ask each mortgage company you speak with to give you a good faith estimate which outlines what costs will be involved in closing this loan. Then weigh the costs against what you will gain by refinancing.

If your new mortgage payment is going down, figure out how much it will be reduced. Let’s say you will be saving $100 a month but closing costs are $2,000. Dividing the amount spent on closing costs by your monthly savings shows that it will take you 20 months just to break even. If there is a chance you are going to be selling in a few years, it may not make sense to add thousands of dollars worth of closing costs to your mortgage.

If you are going to add credit card debt, second mortgage or other loans to your mortgage, you may be extending the life of the mortgage. Although the interest on your mortgage will be lower than the interest on a credit card, you will now be paying on that debt for the length of your mortgage. Say you added $15,000 worth of loans and debt plus $2,000 in closing costs to your mortgage, you are now paying on the amount of your existing mortgage plus an additional $17,000 worth of debt over the life of the mortgage. Is that worth it to pay lower interest for a much longer time or work through the debt.

Get all the facts and decide what is best for you. Deciding to refinance every few years, when rates go down again or you have again run up debt, does not make sense. Each time you will be paying closing costs and increasing the size of your mortgage. One day there will be no more equity left in your home. Never jeopardize your largest asset, your home, without being sure that is the wisest step to take. Refinancing can be a good move, but we sure you get all the facts first.

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