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When you refinance, you take out a new, cheaper loan and use the proceeds to pay off your old mortgage. Whenever you borrow money, there will be costs involved. These might include points—or a percentage of the loan amount—that you will have to pay the bank or other mortgage holder, as well as attorney costs and other fees. Do your homework to find out what the fees will be.
Next, figure out how much you will save each month by refinancing. Given the loan fees and what you might save, does the refinancing still seem like a good deal?
In some cases, you can lower your mortgage costs by extending the term of your loan, but you may end up with a short-term gain and a long-term loss. It’s true that if you have 20 years left to pay on a $200,000 mortgage, you can lower your monthly payments by taking out a new 30-year loan, even if your interest rate stays the same.
However, while you will have more money in your pocket now, you will actually lose money over time. That’s because you will be paying interest over a longer term, which pushes up the total cost of the loan to you.
Whenever you have concerns about the best way to handle your home financing decisions, be sure to turn to your local CPA. He or she can provide answers to the financial questions facing you and your family.
To listen to podcasts with more financial tips, go to http://www.calcpa.org/Content/community/financialempowerment.aspx.