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Refinancing is a common practice that homeowners undertake, especially when mortgage rates are low. However, refinancing does cost a homeowner money and requires careful consideration. When choosing a refinance, there are several points of information that a homeowner should understand if their goal is to save money.
Refinance to Save Money
Homeowners make a choice to refinance for many reasons. In the past, using a refinance for debt consolidation and cash out was very popular. Many homeowners withdrew the equity from their homes to use for other things with many investing in additional properties. In light of the housing bust, consumers have now found out that a home and the equity in it should not be considered a private bank account or ATM machine. As the most important financial decision and largest investment that many consumers will ever have, it needs to handled carefully. This does not mean that refinancing is a bad idea; in fact, it is a very good idea if used responsibly.
Refinancing when rates are low, at least lower than the rate that is on an existing mortgage, has its advantages. Under normal circumstances, when lowering the interest rate on the mortgage, the mortgage payment will also decrease. For this to happen, the refinance must be for the same term loan as the original mortgage. The savings when choosing this type of refinance is seen monthly, but not necessarily over the life of the loan since the years of payments already made from the inception of the original loan are erased. This is the most common refinance and it serves its purpose on a monthly basis.
For homeowners who are not struggling to make the monthly mortgage payment, but are looking to take advantage of lower rates in order to save money in a different way, the better option may be to shorten the term of the loan. In many cases, since rates have been at record lows, the homeowner who reduces the term will also reduce the rate and may also reduce the monthly mortgage payment. However, this scenario depends on how high the rate is on the original loan. In other cases, the monthly mortgage payment may be the same or slightly higher than the original mortgage payment. When looking at the amount of interest that is saved over the term of the shortened loan, the savings is significant. In addition, the mortgage is paid off in full at an earlier date.
Since a refinance does cost money, these costs must always be taken into consideration. A homeowner can calculate how long it will take to recoup the cost of the refinance by dividing the amount of the closing costs by the amount of savings each month which will equal the number of months it will take until the homeowner breaks even. As long as the homeowner plans to be in the home past the break even point, a refinance would be a wise savings decision. If not, it would not be worth the money to undertake a refinance.
Overall, there are definite ways to save money when refinancing. Knowing the details of the current mortgage, the different refinance programs available and the value of the home is a simple way to start exploring options. If credit is in order and the decision seems right, it is then time to look for competitive offers. In the end, refinancing is a personal decision that should be made by and for the benefit of the homeowner.
Author Bio: Rosemary has been writing since 2010 for FreeRateUpdate.com, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, mortgage processor, property manager, and a mortgage underwriter.
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