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Refinance means that you are paying off one loan with the proceeds from a new loan using the same property as loan collateral. Many people consider
refinancing when interest rates have dropped dramatically and they would like to lock in on the lower rates, or, if they would like to borrow against
the equity built in their home. Many people debate between refinance or taking out a home equity loan. In general, the interest rate on a refinance
is typically lower than on home equity financing.
If you are considering refinancing in order to take advantage of a lower interest rate environment, do remember that the ultimate amount you may save depends on many factors, including your loan closing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes. The old rule of thumb is that unless there is 2% differential on interest rates, a refinancing may not save you as much money as you think. That said, however, innovative zero points and low-cost refinancing available these days may make refinancing feasible.
When should you not opt for refinance? If you have a good rate on your existing mortgage, you may want to take a home equity loan instead as the closing cost of refinancing may negate any savings. Similarly, if you think you may be selling your home in the near future, you may not be able to amortize the cost of the refinance efficiently. You also may want a home equity loan if you need to take a high percentage of equity out of your home. Many lenders will allow you to take more money out of your home as a home equity loan than a refinance.