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Reasons to Consider Refinancing

[Apr 21, 2009.]


The St. Louis Post-Dispatch  recently reported the Missouri Attorney General's intention to prosecute two firms allegedly engaging in fraudulent solicitation practices involving mortgage refinancing. As interest rates remain low, and foreclosures continue to abound, homeowners owe it to themselves to carefully evaluate unsolicited offers of "help" before taking action. It's up to homeowners to decide when refinancing serves their needs.  Here are some things to consider if you're contemplating refinancing.

Refinancing: More than Lower Interest Rates

  • Considering closing costs: Refinancing your mortgage can potentially save money, but comparing interest rates isn't enough. You'll want to establish how long it will take you to break even on closing costs, too.

  • Planning to sell soon?: Homeowners planning to move within a couple of years,may not gain the full benefit of refinancing to a lower rate. This depends on estimated savings and the cost of refinancing.

  • Eliminating "Exotic" Mortgage Terms: Homeowners who have an adjustable rate mortgage (ARM) or a home loan with exotic terms such as interest only payments or negative amortization can stabilize their interest rate, payment amount, and eliminate undesirable terms by refinancing to a fixed rate mortgage (FRM).

  • Refinancing for Home Improvement/Renovation/Remodeling: Homeowners frequently refinance to pay for home improvements. When considering this type of refinancing, it's important to know how much planned improvements can add to home value. Consulting contractors for cost estimates, and talking with real estate professionals to determine which improvements add the most value can help in planning the scale of the project and whether or not planned improvements are worth the risk of refinancing to a larger mortgage.

  • Refinancing for Extra Cash: Lower interest rates allow homeonwers to cash out some of their home equity by refinancing for enough to pay off their existing mortgage loans and take an additional amount of cash. Taking cash out depends on the amount of home equity available; mortgage lenders typically require homeowners to maintain at least 20%  of their equity after refinancing is completed. Cashing out home equity can be risky if property values are decreasing; this is one way that homeowners can find themselves owing more on their home than it's worth.

Refinancing is a major financial decision that should not be made spontaneously. Doing some research and comparing refinancing opportunities can help in securing good refinancing terms suitable to your needs.


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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