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Mortgage Rates Not the Only Reason for Refinancing

[Mar 24, 2010.]

 

When shopping for home loans, it's easy to focus on mortgage rates as a sole factor in deciding if or when to proceed with refinancing. With current mortgage rates consistently near 5%, it may be possible to use refinancing for paying off high cost debt, remodeling your home, or taking care of other expenses. Looking at your overall financial needs can help with getting the most out of refinancing.

Refinancing for Debt Consolidation: A Good Idea?

Refinancing a mortgage loan involves getting a new mortgage to replace your current mortgage loan and paying closing costs. The amount of closing costs offsets potential savings suggested by comparing refinance mortgage rates to the rates you're paying on consumer debt. Here are some things you'll need to consider for making your best decision concerning refinancing your mortgage.

  • Comparing Refinance APR Between Mortgage Quotes: The annual percentage rate (APR) includes the interest rate and other costs associated with a loan or credit account. Federal law requires APR information to be clearly posted on loan estimates and credit card statements. Comparing refinance APR between mortgage quotes, helps with finding your best refinance option.
  • Estimating When You'll Break Even on Refinancing: You can use mortgage calculators for comparing mortgage rates; although mortgage calculator tools provide general estimates, you can get an idea of how long it will take to pay off the costs of refinancing before realizing savings. Here is a very basic example estimating your break even period. You compare your current P & I payment against a refinancing quote, and find that you can save $150. per month by refinancing. Your estimated APR for refinancing is $4500. It would take approximately 30 months, or two and one half years, to break even on your refinance. This is a general method of estimating your break even period; check with your financial advisor for more detailed estimates. Understanding how long it takes to break even is important if you're considering selling your home within a few years.
  • Home Improvements and Home Value: The potential value of home improvements can be weighed against the cost of refinancing for financing such improvements; the value of specific improvements varies widely depending on local real estate markets and buyer preferences. Work with local real estate professionals to determine which improvements can add the most value. In general, kitchen and bath remodels add more value while expanding master suites and other more personalized improvements may not add as much value. If you're not selling your home, balancing potential increase in home value with your preferences assists with determining if mortgage refinancing is worthwhile.

Evaluating multiple mortgage quotes and refinancing scenarios is useful for finding your best mortgage loan.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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