In order to make sure home refinancing works for you, you must understand first of all how it functions and where the costs come from. A home refinancing mortgage is just like getting your first mortgage. You are essentially replacing your first mortgage with a completely new mortgage. Thus, you will have to pay some CLOSING COSTS on your refinancing mortgage just like you did on your first mortgage.
So the question comes to your anticipated future in your current home. Do you plan to live there for a long time? Or are you going to refinance and move relatively soon from that home?
To calculate if you'll be able to recover your closing costs, first take the rate of your newer mortgage and calculate how much you'd be saving each month... Then take the estimated closing costs of refinancing your mortgage and divide that by the monthly savings. The number you end up with will be the number of months is will take you to recover those closing costs.
So, if your plans are that you're staying in your home for longer than the months it takes to recover the closing costs, the first step in seeing if refinancing works for you is good. The second step, however, goes unnoticed by many people. This second step involves the TERM of the new loan you are refinancing into. What happens an unfortunate percentage of the population is that they fall into the habit of 'Serial Refinancing', due to not knowing its dangers and hazards.
The TERM on a loan is actually the MOST IMPORTANT part in determining how much you'll actually pay for borrowing a loan. The longer the loan is stretched, the more you pay exponentially! And you must understand, in general with refinancing, getting a new loan at a lower rate will STRETCH your term back out for longer!
What some people end up doing is refinancing every 5 years or so to get their rate down, but what they do NOT know is that their loan is continually STRETCHED out, decades being added onto their term each time they refinance! If you spend your whole life trying to save money by a lower interest rate, but you are exposed to that loan for your whole life, you lose hundreds of thousands of dollars to the lender. So it is crucial that you do not fall into serial refinancing, and that you do NOT refinance if you are almost done paying off your first mortgage. Otherwise, you're just putting yourself in debt for more years, and the lenders won't say a thing!
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