ANSWERS: 1
  • Refinancing your mortgage can often have significant financial benefit, decreasing monthly payments and saving money on interest paid. The key to a beneficial refinance is timing. The frequency with which a person refinances his mortgage varies wildly, from what BankRate.com refers to as "refinance junkies" constantly chasing a lower rate, to those that never refinance. With an understanding of how refinancing affects your mortgage, you can choose the best timing for your financial situation.

    Rates

    One of the most common reasons for refinancing is to obtain a lower rate on your mortgage. Some people refinance whenever interest rates drop, which varies depending on the economic climate and market conditions. While refinancing into a lower rate is often beneficial, you should consider the loan rate in conjunction with the length of your loan term. For instance, if your mortgage has 25 years left on it and you refinance into a lower rate with a loan term of 25 years, you will save money in the long run and have slightly lower payments. If you refinance that same mortgage into one with a lower rate, but extend the term to 30 years, you will be paying lower interest over a longer period of time. This can cost you money in the long run. Extending a loan term too frequently with refinances can be expensive.

    Closing Costs

    Another financial pitfall that the "refinance junkies" fall into is that of closing costs. Each time you refinance your loan, the bank charges fees for origination, underwriting, appraisals, title services, among others. These can amount to thousands of dollars each time, either rolled into the balance of your new loan or paid out of pocket. Refinancing multiple times can cause your accumulated closing costs to outweigh any benefit that might be gotten from lower interest rates. For this reason, BankRate.com recommends that you refinance your current mortgage only once.

    Prepayment Penalties

    A prepayment penalty is a fee charged by your bank for paying off your mortgage early. Typically, these fees are assessed if you pay off the loan within the first two or three years and are meant to discourage customers from refinancing too often. When you refinance a mortgage, you are essentially taking out a new loan which pays off and replaces the old one. This activity could incur a prepayment penalty under the terms of the old loan. If you do choose to refinance more than once, check to see if your mortgage charges a prepayment penalty and include that fee in any analysis of the cost and benefit of refinancing.

    Source:

    Bank Rate - When to Refinance

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