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Refinancing your home: Is it worth it?

June 10, 2011

refinanceMake sure you know the facts before you sign

Refinancing your mortgage is like taking out a new loan at a new, lower rate. The terms change, and most lenders require that you have at least 10 to 20 percent equity in your home before you can refinance.

But how do you know if it’s worthwhile for you to refinance? How do you tell if the difference in interest rates is enough to make financing worthwhile?

Refinancing may make sense if you have a second mortgage or home equity loan with a higher rate. It also makes sense if you want to take advantage of lower interest rates to shorten the term of your loan in order to pay off your loan much sooner.

But sometimes it just doesn’t make sense. If you’ve had your mortgage for more than 10 years, you could end up paying a lot more if you refinance. After 10 years, you should have begun chipping away at the principal, and if you refinance, your payments will once again go against interest. So evaluate your situation carefully, and consider the total interest cost over the life of the loan.

If you are considering a refinance, think about how long you plan to be in the house. If you aren’t staying there long, you could lose money.

But if you’re going to be there a while, figure out how long it will take to pay off the cost of refinancing and start saving money. To do this, deduct the new payment from the current payment to find out what your monthly savings would be. Multiply this figure by your combined state and federal tax rate to get your tax cost, and subtract that figure from your monthly savings. Divide the total of all the fees and closing costs by your net monthly savings after the tax adjustment. This will show you how many long it will take to pay off the refinance.

The bottom line is this: your house is your home. It’s not an ATM. Using it as such is dangerous. If you must refinance, make doing so worthwhile.

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