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Is Refinancing My Mortgage a Good Idea?

In today’s credit-laden world it’s become very popular to consolidate debt through a home mortgage loan. However, not properly understanding the math behind this idea can add up to trouble for many borrowers who have rolled over a  higher-interest-rate mortgage for one charging today’s lower rate.
For example, had you bought a house in 1992 and financed it with a $100,000, 8.3 percent, 30-year mortgage, you would still have $93,000 in principal left to pay in 1999. You could have decided to refinance that loan with a cheaper 30-year loan at the prevailing rate of 7 percent. You would, of course,  have to pay 2 percent in closing costs, or $1,860. However, your monthly payment would have dropped from $752 to $619 — not bad.
But what looks like a big win for the borrower can end up costing plenty. If you had left the old mortgage in place, your 360 payments at $752 per month would add up to $270,700 by the time the house was paid off. Your new mortgage would cost $222,800. But that figure does not include the nearly $54,700 you already paid over the seven years of your first mortgage. A refinance restarts the clock on your payments, so that new loan will end up costing a grand total of about $277,500 over a period of 37 years — an additional cost to the borrower of $6,800.
If you decide to refinance at a lower interest rate, try to get a loan for a shorter period, like a 20-year or 15-year loan and be sure to make the same monthly payments you made under the old loan and perhaps more. In the case of refinancing, most people only care abut the short-term savings, failing to see the real costs they will incur over the long-run. This comes from not taking time to learn the rules, as taught by Money Mastery Principle 5. For more information on the Money Mastery Principles, visit www.moneymastery.com.

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