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To refinance or not refinance
Although advertisers talk about refinancing, it isn’t always a sure-fire way to find fast cash. Anyone that is considering refinancing needs to weigh the pros and cons of a refinance. People who are chronic refinancers and jump on the lowest interest rates don’t always benefit in the long run. They have a long list of fees and closing costs that can add up and eat away at savings.
The real reason for a refinance
The first thing a homeowner should figure out is what their goal is for the potential refinance. People must be aware that refinancing only reorganizes debt. It normally is at a lower rate of interest, but other variables change the equation. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, an economist with Bankrate.com, “Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Discharging debt is great, but if the rate drastically clips income, it might not be a wise choice.”
When to refinance
After honing on the reason a consumer wants to refinance, the next thing to decide on is when. According to Bankrate’s 2008 Closing Cost Survey, the national average for closing costs on a $ 200,000 loan is $ 3,118. That is in addition to taxes, insurance and prepaid items like interest and association dues. Consumers need to remember that getting a lower interest rate extends the length of the loan and, in turn, can cost more in interest. For instance, a mortgage with 20 years left out of 30 will result in a higher amount paid in interest over the lifetime of the loan, and perhaps a larger interest payment if refinanced. There are two calculations to follow when trying to find fast cash from refinancing:
- One calculation where the new loan has the same term as the old loan
- One calculation where the new loan is the length of the planned refinance
From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.
When to not refinance
There are specific instances when a refinance will not help. For example, if a homeowner doesn’t plan on staying in a home for very long, it’s most likely a better idea to stay in the current mortgage. Considering the number of months of savings they need to recoup closing costs, it may take longer than they plan on living in the property. People with underwater mortgages should probably stay with the current mortgage. It’s highly unlikely a homeowner in an underwater position will find a lender.
Another reason to not refinance is hefty prepayment penalties. The penalty payment is another expense for homeowners to add into the total cost of the refinance. Homeowners would be better served by waiting beyond the initial two or three years when the prepayment penalty is active. It’s likely refinancing down the road would be better.
The benefits of refinancing
Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can net some fast cash for people who are smart about the decision. A good financial planner or online banking tool can help steer consumers in the right direction when facing the prospect of refinancing or not.