Does refinancing my home make sense? Get the answers to "Should I refinance my mortgage"?
Refinancing your home can be a great way to save money or to improve your financial situation. However, before you refinance, you need to determine if you are refinancing for the right reasons and if the market conditions are right for refinancing. To have a successful refinance, it is also important to locate a lender who will work as your partner when you ask yourself, “Is it the right time to refinance my home?”
Your home is most likely your biggest investment. So, a decision to refinance your home is not to be taken lightly. To help you decide whether refinancing makes sense, start by reviewing the basic reasons to refinance. Learn why other people refinance their homes, when refinancing may not be the best decision, so you can determine if refinancing is right for you. Before you decide to refinance, define your goals.
Four Reasons to Refinance Your Home
1. Lower Your Monthly Payment
Refinancing can be an effective way to save money on your monthly mortgage payment. Refinancing can save you money, each month, by lowering your interest rate and the size of your monthly payment. Even homeowners who owe more on their home than it is worth are finding refinance programs to help them, such as HARP and FHA Streamline or VA Streamline Refinance loans.
2. Lower Your Total Costs
Refinancing can help you pay off your loan faster and greatly reduce the total amount of interest you pay. Many people are refinancing to shorter-term loans, such as a 15-year loan, to save money over the long term. Refinancing to a shorter-term could increase your payment, so be careful about taking on a payment that could be difficult to afford. It may make sense to refinance at a slightly higher interest rate for a longer term and then to accelerate your payments to pay off the loan faster.
3. Reduce Your Risk: Change an ARM to a Fixed-Rate Mortgage
A good reason to refinance can be when you have an adjustable rate mortgage (ARM) and you refinance to lock into a fixed-rate mortgage. This protects you from an increase in future interest rates, which would cost you money and may make it harder for you to afford your mortgage payment. Many people are taking advantage of the low rates available to refinance their ARMs into a a fixed-rate loan in order to reduce the stress and worry that comes with the uncertainty of an adjustable rate loan. Moving into a fixed-rate mortgage can help you avoid financial trouble before it starts.
4. Cash-out Refinance: Getting Money Out of Your Home
Another reason to refinance is to get money out of your house, which is known as a cash-out refinance. This type of refi allows you to access the equity in your house to use that money for other purposes. Popular reasons to do a cash-out refinance include: consolidating debts that have a higher interest rate than the new loan, making home improvements, and paying for college costs. Of course, any time you take equity out of your house, you want to make sure you assess the risks involved. Be careful that your new mortgage payment is affordable, so you don’t put your house in jeopardy.
Two Reasons Not to Refinance a Home
A refinance is not an easy fix to complicated problems, nor is it an ATM for making unneeded purchases. As with anything relating to mortgages or your house, you need to be smart about a refi and know when it is not the right decision.
1. When a Refinance Does Not Save You Money
Lower rates do not necessarily mean that a refinance will save you money. An important factor is how much will refinancing cost you. Compare your costs to your savings. Lender closing costs and third party fees can add up to several thousand dollars, which can prevent the refinanced loan from saving you money. Make sure to weigh whether you are adding years to your loan, by resetting the clock to a 30-year term, when you have fewer years left on your current loan.
You also need to consider how long you plan to stay in that specific house. If you plan to move in the near term, a refi may not save you money. Talk to a mortgage professional or trusted financial planner, if you are not sure where you stand.
2. Cashing Out for the Wrong Reason
Using the equity in your home to finance a purchase or expense should only be done for important reasons. Millions of Americans used their homes as piggy-banks, during the period of time that home values were rising year after year. People used equity to finance vacations or to spend on frivolous purchases.
Before you take cash out of your home, make sure that the cost is worth the benefit. Any time you pull out equity, you increase the risk of losing your home. Using equity for home improvement projects can increase the value of your house, though you rarely get a return equal to what you spent on the improvements. Don't use your home as a piggy-bank. Using equity for luxury purchases saps the value from your home.
There are four good reasons to refinance a mortgage, and there are valid reasons not refinance, too. Everyone’s situation is different, and it is important to analyze yours before making any big decisions about your home. If you use a refi wisely, you can benefit, but knowing when to say “no” is also important.