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When should I refinance?

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Updated: 3/27/2003 4:09 pm
Refinancing is simply the act of renegotiating the terms of your existing home mortgage or replacing it with an entirely new one. Borrowers generally refinance to obtain a lower interest rate, even if the monthly payment remains the same or increases, because the lower interest rate means less of each payment goes toward interest on the loan. Consequently, your mortgage principal balance is paid off at a faster rate. Of course, refinancing comes with a cost. Lenders typically charge you additional points on your mortgage or other service charges to refinance your loan. As a result, refinancing isn't necessarily always a good financial move if the fees are higher than the cost savings. However, there are some instances when refinancing should be considered. For example, when interest rates have dropped below your current mortgage rate, refinancing could lower your monthly payment. If you plan to stay in your home for a relatively long time, the decrease in your monthly payment will help offset the costs associated with refinancing. Or perhaps you have an adjustable-rate mortgage and want to change it to a fixed-rate loan to have the certainty of knowing exactly how much the mortgage payment will be for the life of the loan. Other reasons to refinance are to consolidate several debts, like credit cards, into one relatively low-interest rate loan, or to convert some of the equity in your home to cash for use like remodeling or to pay for college tuition. Whatever your reason, the first thing to think about before refinancing is how long you plan to stay in your home. If you plan to move within five years and you'll only save $50 or $100 (fifty or one hundred dollars) a month by refinancing, it may not be worth it. Most sources say that it takes at least three years to fully realize your savings from a lower interest rate loan, given the costs of the refinancing. For more information on when to refinance, talk to a mortgage broker or a real estate professional.

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