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When is the Right Time to Refinance Your Mortgage?
You've heard that interest rates are down and you think it
could be time to refinance your existing mortgage, but the entire
loan application process was so exhausting during the initial
loan that you aren't sure it's worth the hassle. You could very
well be right, but there are some things you can do to help
decide whether it's time to refinance your mortgage.
The first thing you need to verify is the interest rate for
your existing mortgage and the interest rates being offered
across the board for new loans. If there's not at least a one and
a half to two point difference, you're probably not going to be
significantly better off to refinance your mortgage. Here's
why.
Remember those closing costs on your initial mortgage? You
probably paid for an appraisal, perhaps a home inspector's
services and even a survey if you have rural property. Depending
on how long it's been since your original loan, you may be faced
with having all those processes repeated. Especially if you are
going with another lender, have had the existing mortgage for at
least two years, have made major modifications to your home or
property, or have seen some significant variations in property
values in your area, you're probably going to be required to have
an appraisal at the very least. While it's not a huge cost for an
appraisal, comparing that with the amount you're going to save on
a slight drop in interest rates could show that it will take
months to recoup that expense. Don't forget that you'll likely
have some additional closing costs from the lender on the new
mortgage (you are, after all, taking out a new mortgage even
though you have an existing loan) and you may even be facing
penalties for paying off your existing loan early. Weigh those
costs against what you expect to save before you take this
step.
So does that mean that you should never refinance an existing
mortgage? Actually, there are plenty of opportunities when
refinancing your mortgage makes good financial sense. If you've
significantly increased the value of your home or have been
paying for several years, you may have enough equity to qualify
for a better interest rate. You may also lower monthly payments
or refinance to make improvements. In the end, it's up to you to
weigh the costs of refinancing your mortgage and decide if the
time is right for you to take this step.
Mark Lambie is the founder of The Loan House a website that
allows consumers to quickly and easily get free mortgage quotes and
mortgage information.
MORE RESOURCES updated Tue. June / 06 / 2023
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