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General Guidelines Before Refinancing


What does it mean to refinance your home?

Refinancing is when you receive a secure loan to replace an existing loan that is secured by the same assets. In other words, you take out a new mortgage to replace the existing mortgage loan you already have. There are many reasons why doing so can greatly benefit you in reducing or consolidating debt that is mortgage related or even non-mortgage related.

When should I refinance?

Refinancing is usually a good idea when mortgage rates have dropped 2 points lower then your current mortgage interest rate according to many experts. A drop in interest rates of 2 points is a good idea because you are usually saving more in interest then the actually upfront costs it took to get the loan processed. Upfront are usually costs related to the appraisal, attorney fees, application fees, title search fees, origination fees (points) and other closing cots.

Refinancing is also a good idea if your home has appraised significantly, you have built equity with payments for a while, or both. Remember, every loan cost money upfront to obtain. Therefore, if you need to take out cash from your house to pay other expenses (credit card debt, tax debt, medical debt, home improvement costs, child's education, etc), then refinancing to take out cash makes sense as long as the value of your house has significantly increased or you have significant equity in the house. Many lenders won't let you refinance for cash out if the new mortgage loan is greater than 80% of the appraised value of your home. A good start in seeing if the value of your home has increased is to look at what homes in the neighborhood are selling for or what they have recently sold for. Remember, you can't out cash unless you have equity (estimated home worth minus your total mortgage balance).

Refinancing is also a good idea when you are looking to improve your cash flow. For example, if your cash flow or monthly budget is tight and you have a 15 year mortgage, then refinancing to a 30 year mortgage will make you pay more interest in the long run but will help reduce your monthly payment generally. Taking a longer mortgage term is also generally smart if the houses in your area are appraising quickly.

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When should I not refinance?

Don't refinance if mortgage rates have dropped less then 2 points below your current mortgage rate as again usually the upfront cost of refinancing will be more then the savings you will obtain. If you plan on selling your home within 3 years or less, do not refinance if you are looking to longer your monthly payment. Compare the amount of monthly savings (multiply 12 months by how many years you plan to live there by your monthly savings from refinancing) to the fees you'll pay to refinance. If the fees are higher than then your savings, it's not a smart move obviously. Lastly, do not refinance if your credit has fallen since the last time you obtained a mortgage. Even if rates are 2 points lower then your current mortgage rate, if your credit is much lower, you can't get those rates.

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