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Should I Refi My Home or Not?

As to the face of this question, yes, you should refinance your home, if you can get an improvement in the interest rate of 1 percent or more.  So the idea has merit, and of course the lending companies are always telling you that to do so will allow you to “save money” and “have more money.”  But here’s my main point with this post: Saving money and having more money through a refi can be elusive.
When deciding to refinance, there are some factors in the process that you don’t know and don’t understand.  Let me try to explain some of them in the broader context of saving interest cost.  Let’s assume a 30-year mortgage at 5 percent with a beginning present value financed of $200,000, and a monthly payment of $1073.64.  The Real Debt to you is a total of $386,510.40.  However, if you refinanced this loan after five years when you had 300 months left to pay, at 4 percent and no closing fees, the savings would be $31,756.47 in Real Debt.  That is a good deal!
However, if your refinance included closing fees of 3 percent of present value balance at 300 months, your Real Debt savings would be reduced by approximately $9,000 or 2.5 percent.
In addition, most refi’s are done by extending the length of the loan back to the original term, or 360 months in this case.  If extended back to 360 months in this case, the Real Debt saving is reduced another 7.2 percent, and with closing fees and the extended term, the total reduction in Real Debt savings is 9.7 percent.  This amounts to  $34,339.64 of increased cost to you!
There is a subtle point here, which is, that to earn money is one thing, but to save money is another.  Most people don’t Know the Rules (see Principle #5) enough to take advantage of the leverage available when refinancing.
Here is the real deal when refinancing:  While lowering the interest rate, make sure to maintain the same payment as before. Simply lowering your interest rate is not enough. You must continue paying the same monthly payment on the debt as you did before to capture real savings.  In this case it results in a Real Debt savings of $86,932.  Now that beats the heck out of earning money, and you don’t have to pay tax on the $86,932! Also, avoid other consumer debt like the plague, don’t extend the term of the refi, and do not consolidate debt into a mortgage refi unless you are following a balanced Spending Plan.
For more information on this and other personal financial questions, call Alan 801-292-1099 alan@moneymastery.com

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