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Making the Refinance Decision

By Sergio Haros

If you own a home, sooner or later you will start thinking about refinancing. Making the decision to refinance should be carefully done or you could regret it.

The decision to refinance is an entirely different situation compared to when you first took out a mortgage. Just think about it for a minute. Your original loan was most likely taken out when you were under the gone to get financing for a decision. Everything was rush-rush and you may not have picked the best deal. Refinancing, on the other hand, is a decision you can take your time on. You donít have to refinance, so you can spend more time analyzing whether it makes sense or not.

The first issue to consider is whether it makes financial sense to refinance. Many people just look at the monthly payments and interest rate for a refinanced loan. Specifically, will the monthly payments and interest rates be lower than what they currently have? While these are important issues, you also have to figure in the cost of the refinance. Specifically, how long will it take to recover said costs through the refinance?

When you refinance, you are going to have to pay fees for things such as the appraisal and may have to pay points. If the fees equate to $3,000 and you are only saving $100 a month on your payment, you are going to spend 30 months paying on the loan before you break even. If you plan to sell the home in that period, it makes no sense to refinance. Make sure to figure in your cost before jumping on a refinance loan package.

A second issue to consider is the term of the refinance. Term simply refers to the number of years you will spend paying back the loan. If you currently have a 30-year loan, you do not have to refinance for a 30-year period. You can go shorter or longer. If you go longer, it will lower your monthly payment. It will also result, however, in you paying much more in total interest over the life of the loan. If you plan to live in the home for the rest of your life, this is a huge additional cost you should probably try to avoid. If you intend to sell in five to seven years, it is less of a concern.

People refinance their home loans for a wide variety of reasons. Refinancing is very common and often a smart move. Just make sure you know the total cost of the refinance and whether it is a good move for your particular situation.

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