Is It Time to Refinance?

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Be sure to carefully consider refinancing your home. There are always pros and cons to any big financial decision.

Some of the most common reasons to refinance include: to lower your interest rate, to reduce the length of mortgage, to make home improvements or cover other expenses, to lock in a constant interest rate if you have an adjustable rate mortgage (ARM), to convert to an ARM to lower monthly payments, to escape a mortgage with a balloon provision and no conversion option, and/or to consolidate debt.

While all the above refinancing reasons are reasonable, there are other factors to consider. For instance, the “refi” process, as you already know, is time-consuming and often expensive.

Calculate Your Savings

Figure out the following: your current monthly payment, the original cost of the home, an itemization of refinancing costs, monthly payment after the refinance, length of time you plan to live in the house after the refinance, the amount still owed on the house, and the break-even point (calculate this by dividing the total cost of the refinance by how much you’ll save each month on your payment).

Regardless of your intention in refinancing, the numbers you have calculated should give you a good idea of whether or not it makes sense to refinance. If it is still confusing to you, there are many online “calculators” that can assist you in investigating refinancing.

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A Cautionary Tale

Alexis racked up $30,000 in credit card debt while starting a new business. Since the value of her house had increased since purchase and interest rates were fairly low, she decided to pay off the high-interest credit card balances and take out cash to do some home improvements.

Alexis paid off all the credit cards with a home refinance and had $20,000 left for home improvements. Then, she took a vacation, bought several expensive pieces of furniture, and used more “refi” money to splurge on Christmas gifts. Six months later, not one home improvement had been made. Alexis’ credit card debt soon reached $30,000 again, she burned up all her equity, and her mortgage payment was $400 more than before.

This cautionary tale should cause you to sit up and take notice. Many refinancers find themselves in the same costly situation. If you want to refinance, it’s a great idea to plan carefully before you do so by:

  1.  Closing your credit card accounts after consolidating debt.
  2.  Make home improvements right away.
  3.  Leave some equity in place for your security.