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Basics Of Home Refinancing

Updated: 7/17/2014 | Article ID: INF26535

Refinancing your mortgage may be a tempting prospect if you want to lower your monthly payments, take advantage of a lower interest rate or fold other debts into one larger loan. Still, you should consider a few basic points before you jump in and sign the papers, to ensure the pros outweigh the cons of this money management strategy.

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If you have a long term plan to stay in your home, refinancing makes better sense than it might if you plan to move in the next few years. Why? For starters, refinancing isn't free. A typical refinancing deal can include thousands in closing costs, which will take several months, if not years, to recoup in the form of lowered payments. The longer you plan to stay in your home, the more likely you'll see the benefits of the lower monthly payment.

Also, refinancing a home usually means a revised loan term. So, if you have five years left on your 15-year mortgage, refinancing may stretch out your remaining outstanding balance over 10 years instead of five. Even though the interest rate on the new mortgage may be lower, it will accrue over this new extended term, which may result in more total money owed to your creditors.
If you are on an adjustable rate mortgage, or ARM, refinancing may offer an attractive way of converting the loan into a fixed-rate mortgage before the adjustable rate – and your monthly payment – shoots up. Refinancing into a fixed-rate mortgage offers more financial stability and protection from rising interest rates, despite its up-front costs.

Keep in mind that even though your closing costs can typically be rolled into the refinanced loan rather than paid out-of-pocket, these costs don't just disappear. You pay for the convenience in the form of interest on the closing costs and the underlying mortgage as well.

In sum, when you're considering refinancing your home, do the math. You should compare the terms of your old mortgage with the new one. Calculate how much additional accrued interest you will pay, factor in the closing costs and the time you intend to spend in the home, and consider if the benefits of decreased monthly payments are worth the costs you will bear.

James Green has composed economic research reports on a freelance basis since 2008. Specializing in business and finance, Green possesses a Master of Science in real estate from the University of Aberdeen and a Master of Science in economics from the University of Lund.

 
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