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The most common reason for refinancing is to save money.
Saving money through refinancing can be achieved in two ways:
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By obtaining a lower interest rate that causes one's
monthly mortgage payment to be reduced.
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By reducing the term of the loan, thus saving money over
the life of the loan. For example, refinancing from a
30-year loan to a 15-year loan might result in higher
monthly payments, but the total of the payments made
during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable loan
to a fixed loan. The main reason behind this type of
refinance is to obtain the stability and the security of a
fixed loan. Fixed loans are very popular when interest rates
are low, whereas adjustable loans tend to be more popular when
rates are higher. When rates are low, homeowners refinance to
lock in low rates. When rates are high, homeowners prefer
adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate
debts and replace high-interest loans with a low-rate
mortgage. The loans being consolidated may include second
mortgages, credit lines, student loans, credit cards, etc. In
many cases, debt consolidation results in tax savings, since
consumers loans are not tax deductible, while a mortgage loan
is tax deductible.
The answer to the question "Should I refinance?"
is a complex one, since every situation is different and no
two homeowners are in the exact same situation. Even the
conventional wisdom of refinancing only when you can save 2%
on your mortgage is not really true. If you are refinancing to
save money on your monthly payments, the following calculation
is more appropriate than the rule of 2%:
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Calculate the total cost of the refinance––example:
$2,000
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Calculate the monthly savings––example: $100/month
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Divide the result in 1 by the result in 2––in this
case 2000/100 = 20 months. This shows the break-even time.
If you plan to live in the house for longer than this
period of time, it makes sense to refinance.
Sometimes, you do not have a choice––you are forced to
refinance. This happens when you have a loan with a balloon
provision, but with no conversion option. In this case it is
best to refinance a few months before the balloon comes due.
Whatever you choose to do, consulting with a seasoned
mortgage professional can often save you time and money. Make
a few phone calls, check out a few web sites, crunch on a few
calculators and spend some time to understand the options
available to you.
If you have questions just ask! You may contact
Virginia Mortgage Bankers, LLC for your mortgage refinance questions by email, phone or by appointment in our
office.
Start now by filling out our secure application for
mortgage loans! Call us at 804.282.8808, Monday through Friday from 9 a.m. to 5 p.m. Eastern time.
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