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People refinance for
many reasons – to lower monthly payments, to pay off a loan,
build equity faster, convert a variable rate into a fixed rate
mortgage etc.
When considering refinancing you not only
need to know what questions to ask about refinancing
but you also need to answer some questions yourself before
you seek out the advice of a lender.
The questions you
need to ask yourself include how long do you plan on residing
in your home and how long have you held your current
mortgage?
In order to make the
costs of refinancing worth it, you need to be in your
home long enough to reap the benefits. Experts recommend that
anything more than five years is good. If you intend to move
before that time you will have little to gain from
refinancing. And if you plan on moving in three years or
less, it makes virtually no sense at all to refinance.
That said, if you’re
nearing the end of a fixed rate loan (in other words, you’ve
already taken advantage of most of your tax deductible
interest), a new loan could prove beneficial. The advantage
here is you can deduct the interest and prorated points year
by year.
Now as to the questions to ask about
refinancing, you need to know what refinancing will cost
you in the way of points, transaction fees and other closing
costs.
Your refinancing lender will be
able to provide you with an amortization chart showing the
real expense of pre-paying interest points. You may want to
also ask for a modified Annual Percentage Rate (APR)
spreadsheet that combines costs over the years you plan to
reside in your home. That said, if you’re considering a
no-points refinancing, be careful to weigh the costs of
any additional interest and other fees that may be hidden in
higher mortgage rates.
Among your
questions to ask about refinancing, you need to know if
interest rates are higher for a cash-out refinance. The rate
of interest you need to pay on a cash-out refinance loan is
usually the same you would pay on a non-cash out loan.
However, there may be an incremental fee associated with
cash-out refinancing depending on the loan program you
select and the loan to value ratio.
Refinancing
can be a smart move. Using the equity in your home to pay off
other bills can really make a difference to your bottom line.
You may wish to pay off any and all debts that have interest
that is not tax deductible. Chances are good you may be able
to deduct the interest on refinancing money. To be sure check
with your tax advisor.
Next, you should be
asking if you can “lock in” an interest rate. Nobody can
predict what interest rates will do but historically rates
tend to go up faster than they come down. So if you’re
thinking about refinancing your mortgage this is among
one of the most important questions to ask about
refinancing.
It’s important for you
to get the best rate you can now. Remember you always have the
option of refinancing later if the rates do drop again.
However, you will also want to bear in mind that any future
interest rates need to be substantial enough to impact your
monthly loan payment.
Before sitting down
with a lender take the time to make a list of the questions
to ask about refinancing. Having all your questions
answered will help you make an informed decision about whether
refinancing is right for you.
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