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Refinance Considerations
Building Home Equity
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Refinance Considerations
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Many borrowers use a refinance to shorten the term of the mortgage.
And brace yourself: Even at today's strikingly low rates, a shorter
term means a higher monthly payment. The benefit is that you'll
build up equity faster and pay far less in total interest over the
life of the loan.
Consider Jim Neill, 48, a real estate broker and his wife Merrilyn,
55, a psychotherapist. Recently, the couple took out a 15-year fixed-rate
loan at 6.75% to replace an 8.13% ARM with a 30-year term. Their
monthly payment jumped by $200, but now they will own their own
home outright by the time they retire. In addition, the total interest
on the 15-year loan will come to $95,447, vs. $222,234 on the remaining
life of the ARM -- and that assumes their adjustable rate would
have held steady at its current 8.13%. "This is forced savings,"
says Jim. "When we retire, we can scale down and take equity out
of the house."
If you can't afford the payments on a 15-year mortgage, your next
best means of building equity is to refinance for less than 30 years.
To do so, ask your mortgage company to customize your new loan's
term to match the years that are left on your old loan -- if you
are five years into a 30-year mortgage, for example, ask for a 25-year
loan.
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