Refinancing is a useful means of adjusting a family's budget and getting equity out of a home. However, before making the decision to follow through on a home mortgage refinance, consider the purpose and how much the overall difference in payments will be during the life of the loan. Factor in the number of years of the loan and all closing costs. Although interest rates may be lower than the original mortgage, there are times when refinancing isn't cost effective.
Lower the Interest Rate
One of the best reasons people choose to refinance their mortgage is to take advantage of lower interest rates. The general rule of thumb is that it makes sense if the interest rate will drop by two percent. However, if the bank offers a mortgage without any closing costs, even a one percent drop may make sense.
Consider adjustable rate loans if a move before the starting rate ends is imminent. Calculate the risks of the interest rate going up by factoring in how long the family will be in the house, the cap on each adjustment of the rate and the overall cap of the interest rate over the life of the mortgage.
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