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The Dollars and Sense of Refinancing

When mortgage interest rates fall, refinancing your mortgage by locking in a lower rate can have many financial benefits. You may be able to lower your monthly payment or shorten the term of your loan, thereby reducing the total amount of interest you pay.

Here are three examples that demonstrate how you may benefit from refinancing:

Lower Monthly Payments

By doing some comparative shopping, you may be able to find a mortgage rate that is substantially lower than your existing mortgage, thus lowering your monthly payments. Usually, refinancing makes sense if you are able to obtain a mortgage that is two or more percentage points below your current rate. Reducing the interest rate can save you thousands of dollars in interest payments over the life of the loan.

Decrease the Amount of Interest Paid

One of the ways to decrease the amount of interest you pay on your mortgage is to refinance at a lower rate and a shorter term. You could significantly reduce the total interest you would pay over the life of the loan, often by thousands of dollars, if you refinance at a lower rate and for a shorter term.

Tap into Equity When Home Value Increases

Equity refers to the difference between the current value of your home and the amount you still owe on your mortgage. So, if you need to borrow, you can put your home to work for you by taking out a Home Equity Loan. As your home increases in value, you can borrow against the equity you've built. For instance, if you owe $75,000 on your mortgage, but your home is worth $150,000, you can usually borrow up to 80% of your home's value (minus the outstanding mortgage balance), or $45,000 in this example. (In some cases, you may even be able to borrow up to 90% of your home's value.)

What's more, the interest you pay on a Home Equity Loan may be tax deductible (consult your tax advisor regarding the deductibility of interest).

How to Decide

When you think about refinancing, consider these three things to determine if it will be worthwhile for you:

  • The difference in interest rates between your present loan and the new loan
  • The amount of closing costs associated with the new loan
  • How long you plan to stay in your home

When you lower your interest rate by a single percentage point with a typical mortgage that has closing costs of 1% of the loan, you can come out ahead after just 18 months. If you plan to stay in your home at least that long, refinancing may make good sense.

Ask a Dollar Bank representative about refinancing your mortgage today. (The examples shown do not factor in any "points" that lenders may charge in conjunction with mortgages or Home Equity Loans. Ask your lender for specific information regarding points.)

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