A subsidized loan is a loan that features a low interest rate because the remainder of the costs are either paid by a third party or waived by the issuer. If you refinance, you are obtaining a new mortgage to replace your existing subsidized mortgage. It is important to determine whether there will still be a subsidy available with the new mortgage or whether you will no longer qualify for the subsidy that is only available to first-time home buyers.
Some subsidized loans require the homeowner to repay the subsidy if the refinancing occurs within a specified number of years. It is important to ask your lender what would be the consequences if you were to refinance.
Refinancing may be a good strategy if you want to get out of a high interest rate loan to take advantage of a loan with lower rates. However, it is important to remember there will be closing costs with a new mortgage that will impact the advantage of a lower rate loan. Therefore, consider how long you expect to stay in your home. For example, if refinancing will reduce your monthly payment by $100 and closing costs are $5,000, you would need to stay in the home more than four years to recover the refinancing costs.
For more information on obtaining a mortgage, see www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
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