Chances are you’ve heard interest rates are low. If you currently own a home, you’ve likely received solicitations to refinance at a lower interest rate or to lower the term of your mortgage. But how do you know if refinancing is a good idea? How do you measure the benefit? Let’s dive into these questions and explore how to determine when, or if, you should refinance.
The term refinance in its basic form means: to finance again. For mortgage lending purposes however, refinancing is when the same customer pays off a pre-existing obligation (home loan) and replaces it with a new obligation (home loan). The replacement loan generally has different terms.
Now let’s dive into discovering how to know when, or if, refinancing is right for you. First, it is important to note that there is no universal rule as to when the time is right for everyone. We all have different needs, situations and financial goals which play into the decision. The information has been laid out in such a way that you may apply it to your own personal situation. My goal is to inform you about refinancing so that you may make the most advantageous decision for your family’s financial future.
So, how do you measure the benefit of refinancing? There are various reasons people might or might not refinance. Let’s discuss the pros and cons.
Pros of Refinancing
1) Lower Interest Rate
-This is a big reason people refinance. Who wouldn’t want to pay less for the money they borrow? Your interest rate directly impacts your monthlypayment and the total amount you must repay. Lowering your interest rate cansave you money.
2) Potential Lower Monthly Payment
-Reducing monthly expenses is a quick way to improve your financial outlook. Whether your goal is to increase savings, pay down debt or begin investing, lowering your mortgage payment can be a big step in the right direction. Refinancing can considerably reduce your minimum monthly mortgage payment.
3) Lower Loan Term
-Reducing the term (length) of your loan can reduce the amount of interest you must pay. Maybe you have paid down your principal balance, can afford a higher payment than when you obtained your original loan or lower you interest rate enough that the lower term won’t significantly increase your monthly payment. Whatever the reason, a shorter loan amortization is the way to go, if you can comfortably afford it.
Cons of Refinancing
1) Extending Loan Term
-If you’ve paid on your current loan for awhile and are refinancing with the same loan term then you are essentially starting over. In the early stages of your mortgage a large portion of your payment goes toward interest and less toward the balance of your loan. If you are adding back months or years to your loan, please consider both the interest you’re adding back and the impact to your monthly principal payment.
2) Closing Costs
-This is a BIG one. Lending institutions are providing a service in return for a fee. Even if the lender doesn’t charge any fees, there are still title company fees, escrow fees (if escrowing taxes/homeowner’s insurance/flood insurance) and costs for recording the new mortgage at the county court house. Be sure you have an accurate estimate of closing costs before you decide to refinance. This is a key factor in calculating how long it takes to recoup the cost of refinancing.
3) Fixed Rate to Adjustable
-While interest rates may currently be lower than the rate on your home loan, refinancing with an adjustable rate isn’t necessarily a good idea. Changing to an adjustable rate can bite you in the butt later when rates go up. Interest rates can directly affect the monthly payment required if your home loan has adjustable interest too, so you never know exactly what you will have to pay at the end of the month.
Thank you for granting me your time. I hope you found the knowledge I shared to be informative and well worth the read. Please discuss all refinancing options with a mortgage professional to ensure the greatest benefit for your financial well-being. Only refinance when and if it makes sense for you.
All loans are subject to credit and property approval.