| Refinancing |
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| Refinancing
your home can be an excellent way to bring down your monthly
mortgage payment, raise cash, or consolidate debts with high
interest rates. However, you need to do your homework before
deciding to refinance. One important factor is the difference
between current interest rates and the rate of your original
loan. You also need to take into account the amount of time
it will take to recoup the costs of refinancing. |
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| When
should you refinance? |
| Some common
reasons homeowners refinance include: |
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| Lower
monthly mortgage payments |
| Convert
an adjustable rate mortgage (ARM) to a fixed-rate mortgage
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| Raise
funds for family expenses (i.e. college tuition) |
| Pay
off high-interest loans |
| Home
improvements |
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| The old
rule of thumb is that you should refinance your home if interest
rates fall more than 2 percent. That's because refinancing usually
involves most of the same closing costs (loan origination fee,
prepaid interest, etc.) as the original loan. For anything less
than 2 percent, the savings on your monthly mortgage payment
might not be significant enough to be worth your while.
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| Savings
vs. time |
| For some
homeowners, though, the 2 percent rule is not as important as
the time needed to break even on the refinancing. For instance,
if it costs $3,000 to refinance a house, and the monthly mortgage
payment is lowered by $90, it would take almost 3 years for
the savings to cover the costs of refinancing. |
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| If all
the information (survey, title search, etc.) for your old loan
is still current, however, the lender may be willing to waive
many of the fees. In addition, you may be able to roll the closing
costs of a refinance loan into the new note. In other words,
you don't avoid the closing costs, but instead pay them back
over time along with the rest of the loan. If you consider this
option, be sure to calculate the potential savings vs. the expense
of paying off a higher principal balance.
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| Keep in
mind that refinancing usually lengthens the time it takes to
pay off your house. If you are 3 years into a 30-year mortgage
and then refinance with a new 30-year loan, you'll end up making
payments on the house for 33 years. Nevertheless, if the monthly
savings are substantial enough, you still could end up paying
much less over the long haul with the new loan.
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| Adjustable
Rate Mortgages (ARMs) |
| Timing
can also be a factor in switching from an ARM to a fixed-rate
loan. For example, rising interest rates might influence you
to covert your ARM into a fixed-rate loan if you plan to stay
in your house for several more years. |
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| Conversely,
you may plan to move in a year or two, and find a lender who
is willing to offer you dramatic interest rate savings with
an ARM. In this case (and as long as the closing costs are minimal),
it might make sense to switch from a fixed-rate loan to an ARM.
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| Equity |
| Refinancing
with a new loan doesn't mean you have to give up all the money
you've paid towards your old mortgage. With each payment, you
build up a certain amount of equity in a property--which is
the amount you've paid on the principal balance of the loan. |
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| For example,
if you have a $100,000 loan at 8 percent, you would build about
$2,800 worth of equity in the first 3 years. Thus, if you refinanced,
the new loan would only amount to $97,200. |
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| Raising
cash with home equity loans... use caution |
| If you've
built enough equity, you can refinance in order to take cash
out of the property. Perhaps you need money to pay off your
credit cards, add a new bathroom, or cover the costs of braces
for a child. Regardless, lenders will typically allow you to
borrow against the equity you've built in your house, plus appreciation
(often up to 75 percent of the current appraised value). These
types of loans are also called home equity loans. |
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| Be cautious,
however, of lenders offering 100 percent or 125 percent home
equity loans--their rates are often markedly higher than traditional
lenders. In addition, any amount you borrow that is above the
market value of the house is NOT tax deductible. |
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| Talk
to your lender |
| With all
the different types of refinancing loans available today, you
should take some time to shop around and speak with several
lenders before making a decision. Be sure to discuss all the
expenses and benefits, as well as what will be expected of you,
in advance. The more you educate yourself, the better your chances
of finding the right refinancing package. |
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