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Refinancing Risks and Rewards

There is always some temptation to refinance if a better interest rate is in the offing. Some people will find that this ends up costing them less money over time. Other people take the opportunity to switch from a riskier adjustable rate mortgage (ARM) to a more stable fixed rate mortgage. However, some thought should be given to whether refinancing is truly the right choice for you.

The costs associated with a refinance should be taken into consideration. The first is interest. Mortgage amortization works on the principle that you pay the majority of the interest early in the payment schedule. If you refinance early in the game, you are trading equity for a (possibly) lower payment. Unless you intend to live in the home long enough to make it worthwhile, you will be spending a lot more money in the long run - money that doesn't come back to you in terms of equity.

Serial refinancers may congratulate themselves on negotiating a smaller monthly payment and lower interest rate, but they may also be setting themselves up for a big interest sinkhole. If they have traded their higher payment for 10 extra years of paying off their mortgage, they will have added years of interest to their overall expenditure on their home, which will probably negate any "savings" that the refinance was supposed to net them. Basically, they're paying glorified rent - putting money in other people's pockets while failing to line their own.

Refinancing should be done as a method of reducing your overall debt, not as a way to extend your loan so that your monthly payments are less, but you end up paying more. If you've been paying off your loan for 10 years, refinancing may not be the way to go, especially if you tack on time spent paying off interest and principle.

Other hidden costs of refinancing that you might have to pay are:

* Administration
* Application
* Appraisal
* Beneficiary Demand
* Credit Report
* Delivery and Courier
* Document Preparation
* E-Mail Doc
* Escrow Fee
* Inspection
* Loan Discount Points
* Loan Origination
* Loan Tie-in
* Notary
* Processing
* Reconveyance
* Recording
* Tax Service
* Title Policy

These have to be checked out and considered part of your over all expenditure for the mortgage loan. Factoring the costs for this in can mean that your "bargain" refinance may not be such a bargain after all. Some of these costs can be waived by the lender; don't be afraid to check every piece of paper you sign and ask for certain fees to be reduced or eliminated.

Refinancing could be a good idea if you have had a serious reduction in your circumstances and need a smaller payment to ensure that you can pay the mortgage every month. Paying less over longer can work for you if it's the only way to keep from the risk of defaulting and foreclosure. If you stay in your home long enough, even extra interest payments can be much cheaper than rent, with the added bonus that *some* money is going towards equity. If you are early enough in your home ownership, refinancing can mean a savings in interest.

Look ahead when you consider refinancing. It can bring temporary relief and less payments every month, but it can also mean that you spend more money in the long run. Ask yourself if you are planning to stay in your home long enough to make the extra expense worthwhile, or if improvements will make your equity cover the interest increase.

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