Posts Tagged ‘benefits of refinance’

The debate over refinancing

It is not always a sure-fire way to find fast cash with talks of refinancing with advertisers. Anyone that is considering refinancing needs to weigh the pros and cons of a refinance. People who are chronic refinancers and jump on the lowest interest rates dont always benefit in the long run. There are a lot of closing costs and fees that will add up and savings will suffer.

The reasons for refinancing

The first thing a homeowner should figure out is what their goal is for the potential refinance. Consumers need to be warned that refinancing doesnt pay off debt, it just reorganizes it. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, an economist with Bankrate.com, Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.

When to refinance

After honing on the reason a consumer wants to refinance, the next thing to decide on is when. The Bankrate 2008 Closing Cost Survey indicated the national average on closing costs for a $ 200,000 loan was $ 3,118. Of course, that is on top of taxes, interest, association dues, and insurance. A lower interest rate extends the length of the loan, and can cost more in interest, as one must be aware. For instance, a mortgage with 20 years left out of 30 will result in a higher amount paid in interest over the lifetime of the loan, and perhaps a larger interest payment if refinanced. There are two calculations to follow when trying to find fast cash from refinancing:

1. One calculation where the new loan has the same term as the old loan
2. One calculation where the new loan is the length of the planned refinance

From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.

When you shouldn’t refinance

There are specific instances when a refinance will not help. For example, if a homeowner doesnt plan on staying in a home for very long, its most likely a better idea to stay in the current mortgage. Taking the savings that people must accumulate to cover closing costs, the stay in the property could be longer than anticipated. People with underwater mortgages should probably stay with the current mortgage. It isn’t likely a homeowner with an underwater mortgage will find a lender.

A further reason not to refinance are prepayment penalties. The penalty payment is another expense for homeowners to add into the total cost of the refinance. Homeowners might be better off waiting until the initial two or three years of the active pre-payment penalty has passed. It’s likely refinancing down the road would be better.

The benefits of refinancing

Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can help consumers find fast cash if they are smart about making the decision. A financial planner or online banking tool can assist people make the right decision over refinancing or not.

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