Refinancing Your Loan

Refinancing means taking out a new loan, usually at a lower interest rate, to pay off an existing loan at a higher interest rate. The process will allow you to potentially save money by having a lower interest rate loan. Let's say you currently have a $100,000 loan at 9% for a 30 year term, but present interest rates have decreased so that you could get a loan for 6% instead. You could refinance the loan so you would then have a 6% loan instead of a 9% loan.

There are several reasons you might decide to refinance your loan.

To Have a Lower Monthly Payment
By lowering your monthly payment you can have more cash available to put into savings, invest, or whatever else you want to do.

To Become More Financially Secure
You may need to refinance even if you aren't going to save much money in the process. For example, you might have a balloon loan coming due shortly, or you might want to switch an unpredictable adjustable rate mortgage for a more predictable fixed rate mortgage.

To Access Cash in Your Home
The equity in your home can become accessible by paying off your existing loan, and taking out some additional cash as well. You can then use the cash to pay for college expenses, investing, etc.

The main question with a refinance is how long before the savings on the monthly payments exceeds the amount of money paid in fees? In other words you want to know the refinance break even point. The break even point is important especially if you are considering moving. If you move before the break even point, you would have wasted money, the loan fees would have exceeded your total savings.

In addition to refinancing to get a lower monthly payment on a fixed rate mortgage, you can also refinance ARM loans. The purpose of an ARM refinance would be to lower your monthly payment faster than waiting for the interest rate to adjust.

The process of refinancing can be rather tedious, however it can save you money in the long run. Be sure to check the break even point of your potential refinance before committing to a loan.

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