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5 Pitfalls of Home Refinancing

Refinancing means starting from scratch

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When homeowners sign up for a 30-year mortgage, the monthly payments made during the first seven years will pay down about 5% of their principal, with the rest going toward interest, says Lattas. Instead of making a dent in their principal, homeowners who refinance after the seven-year mark effectively start the payment process all over again.

Refinancing could also set them back over the longer term, says Stuart Feldstein, president at SMR Research, which tracks mortgages. A homeowner five years into a $200,000 mortgage at a 5.5% interest rate, for instance, might decide to refinance to a 4% rate. Fifteen years after refinancing, the homeowner will owe around $145,000, meaning they built up equity of roughly $55,000 in the home. If they hadn’t refinanced and kept their original mortgage, they’d owe about $139,000 and have equity of $61,000. In other words, unless borrowers need to lower their monthly payment in order to be able to hold onto their home, they might want to reconsider refinancing, says Feldstein.



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