How Do I Determine If It Is Beneficial to Refinance?
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by: marciafreeman
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Refinancing a mortgage can save you money, but make sure you carefully examine and calculate all potential costs and savings before you sign on the dotted line. A refinance essentially trades in your old mortgage for a new one. Most consumers undergo a refinance to get better rates or terms than those of the original mortgage. Term is the length of time before the loan is paid (such as 15 or 30 years). The Lender will examine your credit and your home will undergo the same appraisal process as when you purchased your house and applied for the original mortgage. The home appraisal allows the lender to assess the value of the property now. Your credit score and credit report will be requested, as well as any information on additional mortgages on the home. A refinance will have similar paperwork to fill out as you did when you received the original mortgage on the house. When you refinance, the new loan will be used to pay off the old mortgage and any additional loans against the house. You will be responsible for all fees for titling, preparation of documents, lawyer costs, etc., just like you were when you received the original mortgage.
Most homeowners who refinance choose to do so because interest rates have decreased significantly compared to the current mortgage. When deciding if you should refinance your mortgage, you should first determine the savings you would incur over the life of the loan by using the old interest rate versus the new. Then, compute the cost of the fees and expenses incurred by applying for and obtaining the new mortgage. Do not forget to tally any early pay off penalty fees. Lastly, determine how long you intend to keep the property. Say the new rates are at 5 percent and your current mortgage is 7.5 percent, you could save thousands of dollars over the next 7 years you plan to own that property. If the fees to refinance will only cost $1000, for example, it would be worth it. If you plan to sell in two years, though, it may not be worth the cost of the refinance.
A refinance done at the right time can reduce your monthly payments. Your credit rating will be maintained, since you will not miss payments. Again, assure you do the calculations to determine if the application and settlement costs of the refinance will be less than the savings accumulated over the lifetime of the loan with the new interest rate or term.
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