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Several years ago, my mother refinanced her home. When she told me about it I was young, newly married and living in a basement apartment, and totally naive about what refinancing meant. I heard that she reduced the amount of years left to pay on her mortgage and thought, “Nifty! She’ll be payment free!”

Not that my mom felt the need to go into great detail when it came to the time and money that can be involved in refinancing. She didn’t. But if you are thinking about going the refinancing route–for whatever reason, someone should.

Most people that are in the market to refinance are doing it for one of four reasons:

1. To reduce their monthly payments
2. To consolidate outstanding debt
3. To take advantage of the existing equity in the home
or
4. To get out of a mortgage situation that they don’t particularly like.

If you are thinking about refinance, your first and possibly most important step is determining if it really is something you should do. When I was listening to my mom’s story about knocking ten years off her mortgage, I’m sure I wondered why everyone shouldn’t do the same thing. It’s not that simple.

The only way that you can responsibly make a determination about whether or not to take the refinance plunge is to weigh the time and cost factors.

Here are a few things that you should be aware of before you decide to refinance:

1. You may be charged a penalty for paying off your original loan early. Sounds odd, I know, but it’s possible, and you need to look into it.

2. The expense of a refinance depends on settlement costs, interest rates, points and other costs involved in getting a new loan. You should talk to a few lenders prior to making a final refinance decision about current (and available to you) rates and costs that will be associated. At that point you can determine the bottom line–which is your monthly or overall savings.

3. Evalute how long it will take to get back the costs of refinance by dividing the closing and other costs by the difference between your new and old payments (your savings each month). It’s important that you are aware of the time factor in deciding if refinance is for you.

4. Shopping for points is going to save you money. Like interest rates, you need to be aware that points will help reduce your overall expense. As a rule, each point adds about one-eighth to one-quarter of one percent to the interest rate the lender is offering. Those small percentages can add up and make a difference.

5. Realize that with a lower interest rate, there will be less to deduct on your income tax return. You need to determine whether or not an increase in your tax payments (and in turn a decrease the total savings) is worth taking.

6. Thinking about refinancing isn’t always about reducing your monthly payments. Like my example with my mom, taking a 15 year mortgage and having the same or even a bit higher monthly payments will considerably decrease the interest you pay over the years, and build your home equity faster.

7. Know that you don’t have to use the same lender for your refinance as your original home loan, but as long as you are considering it, find out if your current lender is willing to offer incentives to keep your business. No matter who you choose to borrow with, a lender, according to the Truth In Lending Act, must give you a written statement of the expenses and terms of your refinance before you are bound legally to the loan. Don’t discount the importance of a complete understanding of what you are getting into.

Realize that the eventual amount you could save is dependent on several considerations, which include, but may not be limited to; your total refinancing costs, the effects on your tax deductions, and how long you keep the house you are refinancing.

Talk to your lender. Talk to other lenders. Be certain that refinancing is truly worth all the time and effort that must go into it. Bottom line, “Nifty! Payment free!” doesn’t come cheap.

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