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Signs That You Should Refinance

Thursday, 28 March 2013 08:43

Signs That You Should Refinance

It’s no secret that today’s lending environment is the friendliest for well-qualified borrowers than it’s been in decades. Securing a 30-year fixed rate loan in the 3.5 percent range is not only realistic, it’s become downright commonplace.

Before you run to your local loan officer, however, consider carefully when you should refinance a mortgage. Because while many assume refinancing is an automatic income statement win, banks are not by nature altruistic.

You’ll Qualify for the Rate You Want

Your first and most important consideration comes after carefully assessing your own finances. Although advertised rates are indeed attractive, many if not most borrowers may not qualify for them. Banks reserve premier rates and terms for the most well-qualified buyers. If your credit is excellent, you have ample equity and your income is (and has been) rock-solid, you’ll likely receive the friendliest terms.

Staying Put Is the Plan

Unless your refinance plan is to maintain your existing payment but shorten the term, remember that refinancing will restart your debt clock. If selling the property in question is likely over the next 7 years, the money you save every month on a lower payment may not work to your advantage when it’s time to sell, because the first several years’ payments apply to interest instead of principal.

You’re Not Rolling Existing Debt into a New Loan

Lending officers might have you believing that rolling other debts into your new refinanced loan is wise, and it most likely will free up your cash flow; however, consider that many debts may be paid off within five or so years. Extending those loans to 15- or 30-year terms may wind up costing you more since you’ll be free and clear of the original debts long before your new mortgage loan ends.

As a result, refinancing works best for those who have accumulated significant equity and are able to maintain existing payments with shortened terms. If reducing your payment is the goal, avoid trapping yourself by rolling other debts into the new loan and look for other areas to save instead.

You’re a Savvy Borrower

Finally, if you have ample time to study loan terms and have no trouble walking away from a bait-and-switch deal, refinance. If you can’t meet all these criteria, reconsider your plan.


Capital & Finance Blog