Refinancing can lower your monthly mortgage payment and reduce the total amount of interest that you will pay on your home. With interest rates at an all-time low, it may seem like a no-brainer to refinance.
But before you jump on the "refi" bandwagon to secure a new loan for your home, you should know the pros and cons, as there are some situations when refinancing might not be worth it. So what's the biggest benefit of refinancing today? A lower interest rate. You'll just have to take into consideration how much it costs to refinance, and how long it will take to recoup the costs. If the savings will outweigh the costs, scoring a lower interest rate is great reason to refinance. Depending on your financial situation, refinancing to adjust the length of your mortgage and in effect, your monthly payments, could offer significant benefits. Just like paying off credit card debt in one year versus five years, shortening the loan term means you will pay less total interest on the mortgage.
On the other end of the spectrum, if you're having trouble making payments and are looking for a way to reduce your monthly payments, refinancing could help with that, too. You could go from a 15-year mortgage, for example, to a 30-year term and thereby lower the amount that needs to be paid per month. The other big perk is you can lock in a Fixed-Rate Loan for security purposes. Now is a great time to let go of the uncertainty of an ARM in favor of a loan with a fixed rate that will never change.
However, like most things that seem too good to be true, there are some pitfalls. The biggest is you will have to pay Closing Costs (and Prepayment Penalties), which most view in their minds as the amount it costs to refinance your home. According to the Federal Reserve, closing costs can add up to 3 to 6 percent of the outstanding principal of your loan, and include application fees, loan origination fees, and appraisal fees, among other things. The costs and penalties add up, but if you calculate that your savings from refinancing will outweigh these closing costs, then you're in the clear. Just make sure to do your due diligence and consider your options wisely.
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