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Is Refinancing A Good Idea? Or Costly Mistake?
When mortgage rates are on a downward trend, it’s time to consider refinancing your home loan. The first step is to weigh the pros and cons of refinancing. It could be time to jump on the opportunity, but it also could be time to hold off and be patient. Check this list of pros and cons for refinancing and see if the time is right for you.
The Pros of Refinancing – Time to Act
- You could lower your rate for no cost. If you aren’t very far into your current loan term and your loan is large enough, you might qualify for a no fee, no point loan. Just a half of a percent lower interest can save you hundreds of dollars each month.
- If you have sufficient equity in your home, refinancing could give you the cash to do some major home improvements. The improvements will increase the value of your home which helps you in building equity.
- You will save on interest by converting a higher ARM to a fixed rate mortgage with lower interest. The timing for this is good when rates are going up and your ARM is ending an initial lower interest period.
- Combining loans may save you money. If you have a second mortgage with a higher rate than the first, you might be able to refinance to consolidate them into one lower interest loan.
The Cons of Refinancing – Time to Be Patient
- Refinancing after paying on a loan for a long time may cost you. If you have paid on your 30 year mortgage for 10 to 20 years, you will have a large portion of your payment going to the principal. Refinancing this loan and extending the term will cost you more over the new term.
- Your credit score may restrict your loan options. If you have had some financial challenges that show up on your credit report, you might not get a good rate. Fixing the credit issues might be the best action before considering refinancing.
- Don’t refinancing a home you plan to sell soon. Wait until you know that you will keep the house for a few years before you refinance.
An article in SmartMoney reminds people to look at the long term effects of refinancing versus the short term gain. You may have a lower monthly payment but pay out thousands more on interest over the life of the loan.
Know When to Take Action
Watch the interest rates. Know exactly what the impact will be on your finances when you refinance, short and long term. Shop around for the best rate and the lowest closing costs. When done right, refinancing can save you thousands of dollars.