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To Refinance or Not to Refinance

December 15th, 2011 · blog, Guest Post

When you take out a mortgage or car loan at a young age, there is a good chance that you had to take out a loan with a higher-than-desired rate. While the high interest rate loan was your only option at that time due to lack of established credit, that high rate you may still be carrying around could be hurting your pocket now.

In order to reduce monthly mortgage and auto loan payments, many home and car owners seek to refinance their loans. While refinancing can definitely help you save money each month, it is not always the best option. In the case of an auto refinance, you may not be able to refinance because what you owe on the car is well over the market value. When considering home loan refinancing, you may find that the upfront costs aren’t worth the overall savings.

If you are currently considering refinancing your home loan to reduce your payment and increase your overall savings, ask yourself the following before entering into a new mortgage contract:

How Low Are the Interest Rates?
If the interest rate has decreased by only one percent it will impact your mortgage with greater intensity depending on the size of your mortgage. For a $400k mortgage, choosing to refinance even though the interest rate has only lowered by 1% may be a good idea. For those who only have a mortgage of $100k, the interest reduction may not be worth the overall out-of-pocket expenses and loss of equity the refinance will cost you.

Only choose to refinance if the interest rate will actually impact your mortgage dramatically as this will make the other losses you will experience well worth the overall refinance.

Can You Afford Closing Costs?
When you first take out a mortgage, you are required to pay for closing costs. When you refinance your home mortgage loan, you will be expected to do the same. If you choose to refinance without closing costs, you may wind up with a higher interest rate than expected.

Prior to refinancing, you need to make sure that you are able to afford the closing costs, and that even after paying the closing costs, you will still be saving money by refinancing. If you find that you will not, then refinancing may not be the best option for you at that time.

Are You Aware of the Risks?
Refinancing is an incredibly safe way to reduce your monthly mortgage payments and to save on your mortgage in the long run, but it does come with a few risks. You need to be aware and okay with these risks prior to refinancing, and they include:

  • loss of equity
  • high closing costs
  • negative impact to net worth
  • potentially higher interest rates than expected

Keep in mind, that the above are simply risks associated with refinancing a mortgage and that they won’t necessarily happen to you should you choose to refinance. They simply could if proper precautions are not taken.

While auto loan refinancing does have different risks than refinancing a mortgage, it should still be taken with the same consideration. Overall, if interest rates are low and what you owe on the car is the same or below the car’s market value, then refinancing your auto loan can definitely help you out both short and long-term.

As always, before making any changes to your loan, it is highly important to speak with a financial professional first. You are dealing with your money, and where you choose to allocate it can greatly impact future expenditures and your ability to save.

Nora Charles is a freelance writer that has worked with many bloggers for several years now.

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