When interest rates are low it is popular to refinance your house. This can result in tremendous savings over the years that you own your home. For example consider a loan at 7 percent interest. Over 30 years you’ll pay over $130,000 just in interest. On top of that you’ll pay back the principle and pay for PMI and other fees. If the interest rate is 6% you’ll pay nearly $20,000 less in interest. Not bad for a 1% change.
Refinancing does have a charge associated it. Generally it will cost a couple thousand dollars to refinance. If you plan to be in your house for a long period of time, it may be well worth it. However if you plan to move in a few years, you’ll need to make sure that the refinancing fees are less than what you’ll save in interest.
Another potential for savings is to remove PMI payments. PMI is payment for insurance in case you default on your loan. Once you own 20% of the equity in your house, PMI should go away. When you refinance, it may be possible to have your house re-appraised. If your house has appreciated, you may be able to do away with mortgage insurance way before you’d be able to based on paying off the principle alone. For example, if your house value is worth 100,000, you paid $90,000 for the house, and you’ve made payments on the principle of $10,000, you know own 20% of the equity in your house. When you refinance you should be able to use this to get a loan without the need for PMI.
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