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5 Things to Consider Before Refinancing your Home
A refinance could cut the monthly mortgage payment but whether it is the right move or not depends on some factors. Learn more about some things to consider prior to refinancing a home mortgage that could save time and money.
Refinancing Costs Money
A free finance does not exist as there are closing costs associated with any closing no matter what house a person buys. Anywhere from 2 to 5 percent of the loan amount will be added on and need to be paid upfront. Some options can also include:
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Cover the closing costs using a no-closing cost refinance which can come with a slightly higher interest rate
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Look at closing costs and how those will be covered prior to calculating how long it will take to make monthly payments to repay the closing costs
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If the closing costs will only be covered in four years and the plan is to stay two years in a home, refinancing may not make sense
Savings
Refinancing makes sense when the interest rate on a mortgage is more than 100 basis points above current interest rates. There is no hard and fast rule on how much to save but costs should be recouped in two years or less. A 30-year fixed loan of $200,000 loan might see a rate of 4.83 percent in March 2011. The rate today may vary from that slightly. In six months past the two-year mark, it may take awhile to recoup costs if the loan is considered at a different rate in a different period of time. Doing homework on comparing refinance rates will save lots of time and money in the long run, which requires research on multiple lenders to come to a final conclusion.
Refi and PMI
Private mortgage insurance (PMI) on a loan on a home that has substantial equity could enable a person to cancel mortgage insurance. To do this, the following must be in place:
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Loan balance of 80 percent or less of home's appraised value
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New loan could replace the loan with PMI when appraised and cancel PMI obligations
Equity and Cash
A cash-out refinance lets a person take out a new mortgage for more than the amount owed on the current loan and pocket the difference - typically up to 80 percent of loan-to-value ratio. This may be a good move depending on where the money goes. If this money goes to put an addition on the home, this will increase the property value but come at a higher rate than non-cash-out-refinances. Discretionary spending like vacations or other spending may not be advisable as it does not put equity back into the home. One thing to keep in mind is that if a home's value may decrease in a certain neighborhood where values are going down, it may not be a good time to tap the equity. Weighing costs and benefits is part of the process and requires forward thinking to save money in the long run.
When looking to buy or sell a home in Logan County, Choice Properties Real Estate is the premier company with award winning agents available to assist you in the search. Contact us today to find out how we can help you.