Should I refinance my home loan? How long will it take me to breakeven?

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Should I Refinance

Three reasons motivate people to refinance. One is obvious – to save money because interest rates have dropped. Refinancing also can be a way of raising capital for some other purpose. A final reason is to get out of one type of loan and into another. The following discussion should help you to decide upon the best option in each case.

Spending money to save money.
Most people want to refinance for the same reason that they want a promotion – for the money. When you refinance a mortgage, you have to spend money and time to save money. So you need to crunch a few numbers to determine whether refinancing makes sense for you.
Because refinancing almost always costs money, it's a bit of a gamble whether you can save enough to justify the cost.
Your odds of saving money by refinancing go up a lot when
– Your current intrerest rate is quite high – above 8.5 percent on a fixed-rate loan or 6 percent plus on an adjustable with a lifetime cap above 10 percent.
– You're planning to keep the property for at least five years or more.

Not all refinances cost tons of money. So-called no-cost refinances or no-point loans are becoming more widely available. These may not be your best long-term options, however. No-cost or no-point loans come with higher interest rates.
Use the refinance calculator to calculate how many months it will take you to recoup the cost of refinancing, such as appraisal, loan fees and points, title insurance, and so on.
If you can recover the costs of the refinance within a few years or less, go for it. If it takes longer, it may still make sense if you anticipate keeping the property and mortgage that long. More than 5-7 years is probably too risky to justify the refinance costs and hassles.

Using money for another purpose
The common logic is that refinancing to pull out cash from the house for some other purpose can make good financial sense because under most circumstances, mortgage interest is tax deductable.
If you're starting a business, consider borrowing against your home to finance the launch of your business. You can usually do so at a lower cost than on a business loan.
The most critical question is whether a lender is willing to lend you more money against the equity in your home ( which is the difference between the market value of your house and the loan balance). You will need to know the calue of your property ( comparable rfecent sales in your neighborhood can help you determine what it's worth) to understand how much more you can borrow.
Warning: Financial guru Clark Howard, recommends that money taken out of the house should only be used for home improvements and remodeling. When you default on a credit card loan, the bank can put a bad mark on your credit. If you default on an auto loan, the bank can reposess the car, but you can probably get by using puclic transportation if you need to. But if you shift those debts to your home, and then default on the mortage, suddenly you're out of your home, and you will lose any equity that you may have built up. So now you end up with nothing after what would otherwise have been a small financial setback.

Changing loans
Sometimes, saving money or raising more money isn't the objective. You might be forced to get a new loan. Balloon loans, which come due and payable in full at a predetermined time, may require you to get new financing. Or you may have bought property in partnership with others and now need to cash out one of your partners.
In these cases, you can determine which type of loan is best for you in the same way you do in getting a new loan. Go back and read Fixed Rate versus Adjustable-Rate Mortgages.
There are other cases in which you mightr want to refinance even though you're not forced to and won't save money. Perhaps you're not comfortable with your current loan – holders of adjustable-rate mortgages often face this problem. You may find out that a fluctuating mortgage payment makes you a nervous wreck in addition to wreaking havoc on your budget.
Paying money to go from an adjustable to a fixed is a lot like buying insurance. The cost of the insurance in this case – the refinance – guarantees a level mortgage payment. Consider this option only if you want peace of mind and you plan to stay with the property for a number of years.
Sometimes it makes sense to consider jumping from one adjustable to another. Suppose you can lower the maximum lifetime interest rate cap and the refinance won't cost to much. Your new loan should have a lower initial interest rate than the one you're paying on your current loan. Even if you won't save megabucks, the peace of mind of a lower ceiling can make it worth your while.

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