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 Paying off a loan early with low refinance rates
  Deciding when home refinancing should be done
By the EchoBay Loans Expert
 Paying off a loan early with low refinance rates
Dear EchoBay Expert: Mortgage refinance rates are low now but I'd rather pay off my home loan sooner and keep the same payments. Are there any downsides to doing this? Thank you.

Dear Loyal Reader: This is a great idea. One mistake people make when refinancing is to lower their payments and keep the term the same. By keeping your payments the same and decreasing the term, you will be shaving years from your original repayment schedule and adding thousands to your bank account.

When mortgage refinance rates drop, it is a great time to examine your options. You can sometimes decrease your loan by 10-15 years and keep your payments relatively the same. That can add up to huge savings.

Let's look at this example. John has a mortgage loan of $150,000 for 30 years at 9% with a payment of $1,205. He refinances at 6% for 15 years for a payment of $1,265. For an additional $60 per month, he shaves 15 years from his repayment and saves more than $205,000 in interest!

Theoretically, that savings could buy him a more expensive house and he could pay in cash. Be sure to look at the payment schedules for different terms when you refinance and go for the shortest term you can while still maintaining an affordable payment.

 Deciding when home refinancing should be done
Dear EchoBay Expert: I've read that that home refinancing makes sense when you can get an interest rate that is at least 2% lower than your current rate. Is this a wives tale? Thanks.

Dear Loyal Reader: The answer is both yes and no. Should you refinance if you can get an interest rate that is 2 percent lower than your current rate without paying excessive up-front fees? It might be a good idea. Is that the only time you should refinance? Absolutely not.

Home refinancing can make sense even if you're only reducing your current interest rate by 1 percentage point. For example, a $200,000 loan at 7 percent interest spread out over 30 years would cost you about $1,330 per month. Refinance that loan at 6 percent over 30 years and your monthly payment will drop to $1,199. That's a difference of $131 each month. While that may not seem like much at first, over the term of your loan that monthly difference equates to over $40,000 in savings. Not bad for a one-percent reduction in your interest rate.

Rather than being determined solely by your interest rate reduction, whether or not home refinancing makes sense for you will be determined by a combination of the amount of your interest reduction, the costs associated with refinancing, and the length of time you plan on staying in your current home.

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Avg. National Rates
30 Yr Fixed 5.78%
15 Yr Fixed 5.39%
1 Yr ARM 4.80%
WSJ Prime 6.50%
Fed Funds 3.50%


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