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Refinance Dilemma
With interest rates clicking up like a roller coaster with no peak, when does refinancing make sense for you?


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Expecting a new baby? Aching to take a dream vacation? Wishing for a new Range Rover Sport? There are many reasons couples choose to refinance—and not all of them are related to restructuring debt or covering current expenses. Sometimes couples want to enjoy the equity they’ve accrued in their home by changing their mortgage structure or locking in a lower interest rate. But with rates climbing, is it too late?

Even in a fluctuating interest rate environment, there may still be times when refinancing is necessary and advisable. As you begin analyzing the benefits of refinancing, you'll realize that there are virtually limitless mortgage options available. When you refinance your mortgage you are in effect replacing it with a brand new loan.

In today's market of climbing rates, many consumers wonder whether they missed the boat on low interest rates and question whether or not to refinance when interest rates are higher now than we have seen in recent years. The answer is these rates are not historically higher than usual. While the market will even itself out eventually, these interest rates are only part of the larger picture.

One of the most common refinancing decisions made when interest rates rise is to switch from an adjustable-rate mortgages (ARM) to a fixed-rate loans. Typically, ARM rates adjust every year roughly 2.75 percent. Currently rates are about 5.25 percent, up from about 2 percent two years ago. This means a typical ARM adjusting today is going to 8 percent.

Outlined below are just a few things couples should consider before refinancing. Beyond these, there are many others, so getting a qualified financial advisor is recommended.
  • Your current payment compared to what your payment would be with a lower rate or with features such as interest-only payments.
    Make sure you weigh all your payment options to determine the best plan of action. Besides getting a lower interest rate, other reasons for refinancing could include converting from an adjustable to a fixed-rate mortgage, or wanting to build equity sooner by converting to a shorter-term mortgage.
  • The amount of time you expect to live in your home.
    How long do you plan to stay in your home? The longer you plan to stay in your home, the more you can benefit from a lower interest rate. Refinancing may not be as beneficial if you plan to sell your home in the near future.
  • The cost to refinance your mortgage.
    There are some associated fees that can occasionally get overlooked when considering refinancing. Estimated costs often include appraisal fees, cost of acquiring a credit report, a one percent origination fee, filing fees, and other miscellaneous fees. Be sure to add up all the costs.
Even after conducting this kind of analysis, the decision to refinance is a personal one for which there are no set rules.

Heather Evans is a Financial Advisor for Merrill Lynch based in Vienna, Virginia. She can be reached at heather_evans@ml.com or visit www.MLCC.com for more information.

Refinance Choices
There are numerous home financing choices available. Some of these options include:

  • Traditional Fixed-Rate mortgages: This offers the certainty of regular monthly payments over a long time period, but often comes with a higher interest rate.
  • Adjustable-Rate mortgages: ARMs generally offer a lower initial rate than traditional fixed-rate mortgages, but the rate will eventually fluctuate after the ARM expires.
  • Blended Rate mortgages: This financing option combines a fixed-rate and an adjustable-rate for an initial period.
  • Interest-Only mortgages: This allows interest-only payments for a specified amount of time and any amount paid above the interest payments goes toward paying down the principal.

—Heather Evans



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