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When Does It Make Sense to Refinance?

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The Internet can be an excellent resource for information when it comes to the question “When does it make sense to refinance;” however, there is a lot of bad advice out there. Bad advice can steer you away from the opportunity to save thousands of dollars or worse yet, cost you thousands of dollars in hidden markup and junk fees. Here is a logical approach to answering the question “When does it make sense to refinance?” with confidence for yourself.

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When Does it Make Sense to Refinance?

Ask any financial advisor the question “When does it make sense to refinance” and many will quote you the 2% rule of mortgage refinancing. This particular nugget of bad refinancing advice dates back to the 1980s when most people had double-digit mortgage rates and the costs of taking out new home loans were much higher. Today, with low mortgage rates and affordable fees the two percent mortgage rate no longer holds water when evaluating your refinancing options.

Instead, it makes more sense to evaluate your refinancing options on a cost versus savings basis. You can answer the question when does it make sense to refinance for yourself simply by determining how much it will cost you in origination fees and other closing costs and diving the amount you save each month by your total cost. This assumes that your new mortgage payment will be lower than the old one; however, keep in mind that there are valid reasons for refinancing with a higher mortgage payment, including taking cash back at closing.

Evaluate Your Mortgage Refinancing Options

Here’s an example to illustrate my point and help you answer the question “When does it make sense to refinance?” Suppose you’re refinancing your home for $250,000 and your old mortgage rate was 6.5%. Your old payment on a thirty year, fixed- rate mortgage loan would have been $1,580. You have the opportunity to refinance at 5.5%, which will cost you $5000 in closing costs.

So is this a good idea? It is when the amount of time it takes you to recoup the $5000 is acceptable for you. In this example, your new, lower mortgage payment will be $1,419, which is a savings of $161 per month. Because it’s costing you $5,000 to refinance this home loan it will take you 31 months, ($5000 divided by $161) just over two years to recoup your expenses. If this is an acceptable timeframe for recouping your expenses then you have the answer to the question “When does it make Sense to Refinance?”

You can learn more about answering the question When does it make sense to refinance? by checking out my free Underground Mortgage Refinancing Videos.

Here’s a quick sample that exposes why your neighbors are all paying too much for their home mortgage loans.

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{ 1 comment… read it below or add one }

Jennifer September 10, 2012 at 9:14 pm

Thank you for this thoughtful video, and helping those who are in the dark about such a confusing topic. Is there a personal financial advisor who specializes in re-financing, that one could hire to see if it is even a good option to re-finance or assist with the process?

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