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You’ve Decided To Refinance, Now What?
by: Robert Michael

Researching and knowing your options is the key to making a responsible decision when you decide to refinance your home. You may wonder how to take advantage of offers like no-cost refinancing, or what type of new mortgage is right for your unique situation. Having the right information and asking the right questions is the key to making a decision you will never come to regret.

First of all, when you refinance, you should keep your long-term financial goals in mind. Something that looks like a great deal in the short-term can actually end up costing you more than if you had never refinanced at all.

No-cost mortgages are one trap homeowners are prone to falling into when they refinance their home. Sometimes, no-cost mortgages are a great way to refinance and save a lot of money. But in some situations, no-cost mortgages can disadvantageous, and some no-cost mortgages are really not the deal they claim to be.

Some lenders say they offer no-cost refinancing when they are actually charging you fees and adding them to the total mortgage amount. Often, these fees stay hidden, and the consumer never knows that they are paying higher monthly payments thanks to a dishonest lender. True no-cost refinancing means that the lender pays all costs on your behalf, charges you no fees for service and DOES NOT increase the total loan amount.

If the interest rate on the no-cost loan is lower than the interest rate on your current mortgage, then you can save thousands by going with the no-cost loan. But be sure to read all contracts thoroughly, and make sure everything adds up. That way, you can avoid being charged any hidden fees that may increase your monthly payments.

Another important decision is whether you should refinance from an adjustable rate mortgage to a fixed rate mortgage. Some consumers see this as a no-brainer – isn’t it always advantageous to lock in an ARM to a lower FRM?

The answer is no, not always. If you do not think that you are going to remain in your home more than a few more years, then the cost of refinancing to an FRM may be more than the money you will save on the interest. Again, always keep long-term financial goals in mind.

When is it not a good decision to refinance? In order to benefit from refinancing your mortgage, you must remain in your home long enough to break even. This is called the “break-even” period, or the period of time it takes for the interest savings to cover the cost of refinancing. Often, lenders will figure your break-even period by simply dividing the cost of the new loan by the reduction in the monthly mortgage payments. This is NOT the correct way to determine the break-even period.

The problem with this equation is that it does not take into account the length of the new or old loan. Depending on whether you refinance for a 30 or 15 year mortgage, your break-even period could be much shorter or much longer than this simple equation might have you believe. Be sure to ask your lender if they took into account the length of the loan when calculating your break-even period.

The decision to refinance your home is one of the most important decisions you will ever make. Knowing what your long-term financial goals are and never losing sight of them can mean the difference between making a decision you regret, or walking away from the closing table a happier homeowner.



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