Refinancing with a new loan at a lower rate of interest is often an attractive option for those who may qualify.
Fast-talking commercials spout catchy slogans and a few numbers that sound just confusing enough to entice someone to call. But what is refinancing and how might it benefit the homeowner to refinance their mortgage?
Often, you may hear someone say that they got a killer deal on a new rate and could not be happier! However, refinancing carries with it a cost of its own and could potentially increase the overall expense to those who ignore the costs associated with the transaction itself.
Each borrower is different, so it is the responsibility of each homeowner to decide when all the variables are right for them to refinance.
Personal financial and lifestyle choices can drastically sway the decision and potential benefits of refinancing. How much lower is the rate that is being offered? How long is the homeowner planning to stay at that house? And ultimately, how long will it take for the lowered rate to create a net benefit for the borrower? Each borrower is different, so it is the responsibility of each homeowner to decide when all the variables are right for them to refinance.
It is also important to decipher exactly what the homeowner hopes to achieve from of the process. Two of the many reasons include reducing the overall interest expense and consolidating debt.
There are also different types of refinancing. One is where the homeowner refinances the existing mortgage balance. Then there is also a cash-out option for those looking to refinance for a greater amount than what is owed. The borrower may then be eligible to receive the difference in cash.
If the decision is made to pursue cash-out refinancing, it is important to consider the associated closing costs. It is always prudent to calculate how many months of the decreased interest rates will it take for refinancing to yield actual savings.
Also do not forget that cash-out refinancing may include many of the same considerations as taking out a mortgage in the first place. A new credit check will be performed and fluctuations in lifestyle and debt accrual may have changed the homeowner's debt-to-income ratio, both of which may materially affect the end result.
Many homeowners are specifically looking to just lower monthly expenses. Extending the duration of the loan, which effectively spreads the total cost over a longer period of time may oftentimes compensate for additional closing costs and fees associated with refinancing.
Always understand your own personal financial situation and loan terms.
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