In recent years a vast number of homeowners have refinanced their homes, setting a trend that has inspired the curiosity of millions of other home owners. At face value, it seems like an obvious thing to so would be to redraw up the terms of a loan if the interest rate is lower than the original loan. Although these principles are true, the actual practice of refinancing comes with some unforeseen pitfalls that need to be taken into account.

Just like owning a home is not always better than renting a home, refinancing is not always better than not. Both situations often depend on how long an owner desires to remain in their home. If an individual purchases a home in a relatively stagnant home pricing market and quickly decides to move, they will not have earned enough equity to make up for the extra money paid at closing. Closing costs can often add up to anywhere between three to eight percent of the home’s entire cost. Closing costs are included in refinancing as well. Many fees go into the closing of a loan. Although they might not be as steep as purchasing a new home, they still can add up to a good majority of the entire home. Refinancing is useful usually when current interest rates are significantly lower than the interest rate on the original mortgage. Or, if the interest rate is still lower, and the owner is planning on being in the home long enough to where the discounted monthly rate will pay off the closing costs of the new loan.

Often times, when making a loan, a lender will not want the loan to be paid off early because then they will miss out on the extra interest that accrues throughout the full length of the loan. To prevent a borrower from paying off their loan early, a lender will add fine print to the contract adding penalties to a borrower who does cancel a loan early. In these cases, it is wise to add the cost of the penalty to the cost of the new closing costs. This may extend the amount of time it takes to pay back a loan significantly.

Another great point to include is the purpose of refinancing. Car loans, credit cards, etc. can carry a high interest rate and are almost always wise to pay off. The worst thing a home owner can do is take the equity out of the home by refinancing so that they can spend the money on things that do not appreciate because this takes equity out of the house and adds additional consumer debt.

The last word of advice is simple. If your current lender is doing a great job then there is no need to change. Simply stated, refinancing with your current mortgage broker could save time, money, and energy. The current lender will probably already possess a record and have up to date knowledge of the borrowers’ financial records which in the end makes things better for everyone.

Author Bio: Juhlin Youlien writes about az real estate including Paradise Valley AZ homes for sale and Fountain Hills AZ homes for sale. Paradise Valley real estate and Fountain Hills real estate contain luxury homes.

Category: Real Estate
Keywords: homes, real estate, buying a home, selling a home, realtor, realtors, loan, mortgage, foreclosure, s