Refinancing a House – How to Save Money on Interest

mock up of a house and a money jar

Refinancing a house is as mind-boggling as buying the home in the first place. There are many questions that run through the mind of someone about to make one of the most important financial decisions of a lifetime. In many cases, refinancing a house means losing money, either now or in the long run. There are interest rates to consider (yours and the market’s), not to mention the cash required in almost all cases for closing.

To avoid losing money, your refinancing plan should be based on long-term considerations rather than short-term financial stress. When people run into financial problems, their first inclination is often to start lowering their bills. However, refinancing generally isn’t free. Deals that appear to be “free” often have a catch that becomes clear only after the refinancing is complete.

Important Considerations When Refinancing

The first step in refinancing is to analyze the current market and determine how your existing interest rate compares to the proposed rate. If you have a fixed interest rate and are considering a variable interest rate, there’s a good chance the variable rate will cost you more in the long run.

Also, consider the value of your home. How fast is it appreciating? Is the neighborhood around you improving or declining? You can often build equity faster in a home that is appreciating rapidly with a lower interest rate than in one that is either stagnant or depreciating. However, if you were lucky enough to buy in a neighborhood just before a real estate boom, you might be among the fortunate few who will not lose money on a refinance.

The basic rule of thumb for refinancing a house is simple on paper. However, real life is rarely that simple. If you plan to stay in your home for at least three more years and you are looking at a lower fixed interest rate in a rapidly appreciating neighborhood, you’re likely to walk away with a better deal. On the other hand, if you’re planning to move in under three years, live in a neighborhood where homes are averaging or declining in value, and are considering a variable interest rate, you’re likely to lose money on the deal.

However, life is complicated, and other factors may come into play.

For example, not all homes in a neighborhood are of equal value. In some cases, a very nice home can appreciate while the surrounding homes depreciate. This appreciating home may be slower to increase in value but can still rise at a reasonable rate. Conversely, a home in a deteriorating neighborhood could face depreciation, making a refinance less profitable.

Some lenders charge hefty closing costs, while others charge none. These variances are worth investigating, as closing costs require cash on hand. We’ve all seen commercials advertising online applications, multiple offers, and zero closing costs. These deals come with mixed reviews from the public. Some find the hassle worth it, while others feel they were taken advantage of or that they got a bad deal in the long term. Ultimately, these deals depend on the lender you choose, how far you’re willing to go to avoid closing costs, and whether you’re comfortable working with a company that doesn’t have a physical office or a live human to speak with. In some cases, loan officers are remote, which can be frustrating if you need to reach them at a moment’s notice.

If, after analyzing the market and considering your home’s situation, you believe refinancing is the right move, you are probably correct. However, many people seek advice from a financial planner before making this decision. A financial planner can spot challenges or considerations that you may have missed, especially if it’s your first time refinancing.

Once you’ve confirmed that your plan is solid, the key to refinancing is shopping around where you’re comfortable. For some people, online business is ideal. For others, face-to-face interaction is necessary. Shop around, but ensure you’re doing it in an environment where you feel at ease. After all, it’s your money, and you don’t want to feel uneasy about your decisions.

Finally, talk to people who have already refinanced their homes. Hearing about their experiences can provide valuable insight. However, keep in mind that each experience is unique. While some may offer helpful tips, others may share negative aspects based on their own bad experiences. Take everything with a grain of salt, stay aware of potential pitfalls, and do your homework before making any decisions.

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