Three Rules Of Thumb For Mortgage Refinancing - part 1
by Stephen Nelson
You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that's not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.
Rule 1: Don't Ignore Total Interest Costs
You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.
When people refinance, they tend to focus solely on the loan interest rate. But they often don't pay as much attention to the loan term or the loan balance.
When you use refinancing-even refinancing at a lower interest rate-to increase your borrowing or to extend the time over which you borrow, you often aren't saving money.
Rule 2: Trade Expensive Money for Cheap Money
For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan-this is the best measure of the new loan's interest rate cost-and then compare this to the loan interest rate on your old loan.
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Three Rules Of Thumb For Mortgage Refinancing
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