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Reasons For Refinancing a Home
Refinancing a home is not a decision to be taken lightly, but in this day and age of ARMS gone bad and a record number of foreclosures, refinancing can be a way to get some relief. However, not all reasons to refinance a home are for bailing you out. Find out why people choose to refinance their homes, when it may not be the best decision, and whether it may be right for you.
When to Refinance Your Home
There are many situations when refinancing a mortgage is a good decision for you. It can save your house, save you money, or help you with other financial needs in your life. Read on to learn more.
Avoid Foreclosure with a Refi
If you are on the brink of foreclosure and are desperate to save your home, refinancing may be the answer for you. Whenever you are having trouble paying your mortgage, it’s always a good idea to approach your lender and discuss the issue with them. They may be open to helping you through a refi. This can help you lower you current interest rate, lock in a fixed rate, and/or change the length of the loan. This can lower your monthly payments and make your mortgage more affordable, helping you avoid foreclosure and save your home. You can also talk with other lenders or mortgage brokers to see if they have programs available for you. The biggest obstacle in this situation is going to be whether you have enough equity in your home. If you don’t, you need to talk to your lender and review options.
Changing that ARM to a Fixed Rate
Maybe you’re not on the brink of foreclosure, but you do have an ARM (adjustable rate mortgage) whose rate is going to increase in the near future, making it harder for you to deal with your mortgage. Many people are solving that problem by refinancing their homes to get a fixed rate so they no longer have to worry about when and how much the rate on their mortgage will increase. This can help you avoid financial trouble before it starts.
Saving Money When You Refinance Your Home
Not everyone who refinances a home does it because they are experiencing some sort of financial trouble. Usually, refinancing is an effective way to save money on your monthly payments. For the same reasons that it can help people avoid foreclosure, it can help you save money by lowering the interest rate, lengthening the terms of the mortgage, locking in on a fixed rate or paying off other higher-interest rate debt.
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. Many people do this to pay off other high-interest debts they may have. It’s also a very popular choice for finally doing those improvements around the house. Of course, any time you take equity out of your house, you want to make sure you assess any possible risk involved and confirm that you are not putting your house in jeopardy.
When Not to Refinance a Home
When you refinance a mortgage, it isn’t an easy fix to some complicated problems, nor is it an ATM for making other purchases. As with anything relating to mortgages or your house, you need to be smart about a refi and know when it isn’t the right decision.
When a Refinance Doesn’t Save You Money
Just because rates have gotten lower doesn’t mean that deciding to refinance you mortgage will save you money. You need to thoroughly assess the situation and evaluate how much you will save, if anything. It’s important to remember that with any mortgage, including the one you are about to refinance, there are always fees involved, such as closing costs. These can add up to several thousand dollars which can prevent the refinanced loan from saving you money. You also need to consider how long you plan in staying in that specific house. If it’s not very long, then a refi may not actually save you money in the end. Talk to a mortgage professional or trusted financial professional if you’re not sure where you stand.
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Average Mortgage Rates
| program | apr |
|---|---|
| 30 Yr Fixed | 5.4% |
| 15 Yr Fixed | 4.93% |
| 30 Yr Fixed Jumbo | 6.31% |
| 15 Yr Fixed Jumbo | 5.84% |
| 3/1 ARM | 5.03% |
| 5/1 ARM | 4.41% |
| 7/1 ARM | 4.73% |
| 10/1 ARM | 5.23% |
| 3/1 ARM (I/O) | 5.35% |
| 5/1 ARM (I/O) | 4.64% |
| 7/1 ARM (I/O) | 5.09% |
Cashing Out for Frivolous Purchases
We all would love to go on that two week Caribbean vacation or buy the car we’ve always dreamed of driving, but using a cash-out refi for such purchases isn’t a very smart choice. Once you get into the habit of using your mortgage as a way to pay for things you can’t really afford, you run into the danger of going into debt you can’t handle or losing your home. Using the money for something like home improvement projects can actually increase the value of your house, but using it for other big ticket purchases will only drain the equity from your home.
There are plenty of good reasons to refinance a mortgage, and there are plenty of ways that can get you into trouble. Everyone’s situation is different and it’s 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” can also be to your advantage.
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