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Deciding on Refi

A simple way to test if you need to refinance or not

Now that refinancing is a hot option for troubled homeowners, many are wondering if this is a wise option for them. You’ve heard of ads these days from lenders promising to change the terms of your current loan into a lower, fixed loan and for some firms, they’re offering more incentives just to get you take a bite at their tempting offers. But is refinancing really for you?

The key to understanding the whole concept of mortgage refinancing is to consider long-term benefits over current expenses. Here’s a simple calculation:

For a $200,000 30-year mortgage with 7 percent interest rate, you’ll be paying $1,332 monthly.

Successfully refinancing a loan with a 5.5% interest rate would reduce your monthly payments to $1,136. That’s a huge savings of $196 per month.

However, since mortgage payments are only a portion of your total expense, you have to add in closing costs as well. For example, in Greenville, SC, Bankrate.com estimates that total closing costs amount to $3,185 for a $200,000 loan.

To break even on your refinance, it would take you:
$3,185 (closing costs) divided by $196 (monthly savings) = 16 months to break even

Here’s the tip: If you plan to stay in your house for more than 16 months, it’s best to refinance so you can recoup your closing costs with the potential savings you will get from your lower interest rate. Move before then and you will loose money.

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