A Refinancing Reality Check

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A Refinancing Reality CheckInterest rates are dipping, engaging the attention of a lot of homeowners. Refinancing at this juncture is appealing to a lot of them. Yes, refinancing can save you a lot of money, provided you don’t get misled and adopt the wrong strategy. We advise you to keep the conventional wisdom and contemporary opinions on the side for a moment and read the following:

Does refinancing always save you money?

Ask yourself this—saving a couple of dollars every month isn’t really making a saving? You need to calculate the kind of payments required as a part of the refinanced mortgage. Until the approximated figure is a lot lower than your current monthly payments, refinancing isn’t a great option. Further, think about the kind of possible problems associated with your sources of income. A refinanced loan will stretch the loan term. A dramatic increase in your loan term, with peanuts for monthly savings isn’t the best bet. New loans also present initial, higher payments. If you are not sure about earning as much in the next few months, freeze the refinance option for the moment.

Which saves more: refinancing or prepayments?

Some homeowners believe that prepaying their monthly payments always translates into considerable savings—much more than refinance savings! Please have the patience to do some basic calculations. If refinancing is sure to save you more, then go for it. Even better, you can combine refinancing with some degree of prepayment. Here, you need to keep-up the prepay amount before you opted for refinancing. Combining these two can exponentially raise your total savings!

Should you always opt for refinance when rates are slipping?

This isn’t always true. You should be more concerned about how long you expect to reside in the present property. The longer you plan to occupy the present home, better are the chances of you saving a considerable amount of money. Otherwise, sticking with your current loan isn’t a bad idea. Use the calculator and systematically crunch some numbers to make the decision. If you plan to live for a longer period, even a small dip in interest rates can help you save money—even less than 1 percent!

Refinance = Lower interest rates + Less monthly payments, so why the apprehension?

Penetrative advertising has induced the idea that you should consolidate your debts with refinancing. The supposed savings, including tax deductions, are beyond your imagination! Don’t get misled by such sales pitches.

Debt consolidation via refinancing is more relevant if your expenses are not expected to rise dramatically. If making monthly payments as a part of refinancing means even more credit card bills, you need to rethink your strategy. Are there increasing foreclosures happening in your neighborhood? Are the property rates on the slide? If the immediate economic environment seems less enthusiastic, hold on.

Should you borrow more than needed to spend on vacations or home improvements?

We would like to clear a common misconception—refinancing for a bigger-than-required amount isn’t a clever thing to do! Yes, home improvements can add to your home’s value. However, do you really need to do it immediately? Try to address the urgency of the issue. Sacrificing your equity for a home improvement project doesn’t look sensible.

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