When to Refinance Your Home
When is it a good idea to refinance? It depends on your financial situation and what you’re looking to get out of refinancing.
Here are some common scenarios where refinancing your mortgage makes sense.
Lower Your Interest Rate
One of the most common reasons to refinance a home is to lower the interest rate.
If you are able to find rates that are 1.5%-2% lower than you are paying now, it may be worth thinking about. Keep in mind however, that when you refinance you will need to pay closing costs and possibly extend your loan terms.
Refinancing could actually lead to higher monthly payments than you have under your current terms, so do the math beforehand.
Make Your Monthly Payment More Affordable
If you are having trouble making your monthly payment and aren’t as concerned about paying more over the life of the loan, refinancing may be a good option.
You can lower your monthly mortgage payment by extending the loan terms. While it’s not advisable from an investment perspective, sometimes affordability is the most important factor.
Build Equity Quickly and Pay Off Your Mortgage Sooner
For people who have no problem paying their monthly mortgage payment, refinancing to shorten the loan term is a great way to quickly build equity.
It will also enable you to pay off your mortgage sooner, with less interest. Of course, since you’re paying off the same amount in a shorter period of time, your monthly payment will be higher.
Change Your Loan Type
Adjustable-rate mortgages (ARMs) typically have interest rates that start off low and increase over time.
Depending on your situation, you may be interested in changing your loan from an adjustable-rate mortgage to a fixed-rate mortgage before the interest rate increases. Refinancing will enable you to make this change.
While this may seem like a great idea, make sure you compare the closing costs with how much you will save over the life of the loan. If you’re going to be in the house for at least a few more years, changing your loan type will usually work out in your favor.
Consolidate Your Debt
Have you taken out a home equity line of credit (HELOC) on your home? If so, refinancing is a great way to consolidate your debt.
Combining your HELOC with your mortgage will make things simpler by giving you only one payment and one interest rate.
If you find yourself in any of these situations, refinancing may be the way to go.
To learn more about the ins and outs of refinancing, contact one of our mortgage specialists at a branch near you.