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Home Refinancing Part 3 – Drawbacks

Last post, we covered how to refinance your home.

With a reduced interest rate, you have the ability to either pay down your mortgage at the same speed as before but with a lower payment, or (the much smarter alternative in our opinion) you can keep the same payment, and pay off your mortgage much, much faster.

So why isn’t everyone refinancing their mortgage everytime that the Fed announces they’re pushing back their interest rate hike schedule? Two reasons… one, the average Joe is not interested in the slightest. TV news refuses to cover it, because important events directly affecting your life isn’t their job. Getting eyeballs on advertisements is. Which means down with Ben Bernake, and up with Lady Gaga.

The second reason people aren’t refinancing left, right, and center is that your mortgage almost certainly came along with an early payment penalty. If it didn’t you would almost certainly have been penalized with a much higher interest rate, which you wouldn’t have accepted. When you refiance your mortgage, you are not simply changing the terms of your current mortgage, you are paying off your current mortgage and beginning a new one, which will incur your early payment penalty, which is in the thousands of dollars range.

So when is it a good time to refinance and eat the penalty? When you can reasonably expect to make back the money on the penalty via reduced payments within a few years. It takes a little bit of calculator time to figure out, (If my payment reduces by $100 per month, that’s $1200 a year, it will take 3 years to pay a $3600 early payment penalty) but it can definitely be worth the effort.

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