When to Refinance Your Home

When to Refinance Your Home

Refinancing a home loan can be a creative way to access additional money easily. Refinancing allows you to convert an existing mortgage into a fully paid off one, and thus obtain a new loan. In many cases it is considered a favorable option for consumers, especially if they have good credit. Now is a favorable time to consider refinancing as interest rates are at their lowest rates in years. Compare the scenarios below to consider whether it is worth your time and to refinance.

When to Refinance: There are times when refinancing your existing mortgage loan can prove to be ideal.

  • Lower Interest Rates: If you secure a new interest rate, at least one percent lower than what you have now, refinancing for the same length of loan term will save you money. You will build equity faster as you will have a lower monthly payment too.
  • Shorten the Term: Cutting your loan term from 30 years to 15 years will mean a higher monthly payment, but a much lower overall cost of buying your home.
  • Get a Fixed Rate Loan: A fixed rate loan is a good idea if you currently have an adjustable rate mortgage (ARM) and are seeking to avoid the risk of paying more at a later time.
  • Consolidate Other Debt: Consolidating other debts through a refinanced mortgage loan can be beneficial, but only if you able to overcome the risk of defaulting.

When Not to Refinance: Loan refinancing can be less beneficial in several situations such as:

  • Term Extended: If you refinance your loan to get a lower monthly payment, but you extend the terms; you will likely spend more money in the long term to purchase your home.
  • High Monthly Payments: If you refinance your home to pay off high-interest credit card debt or other types of unsecured debt, this can lead to high monthly payments. If it results in defaulting on your payments as they are too high, you could lose your home.
  • Not Making Credit Card Payments: On the other hand, not making payments on those credit cards, while financially devastating, will not lead to your home being confiscated. It also indicates you do not have money to pay payments.
  • Interest Rates Less than One Percent: If you refinance your loan at an interest rate that is less than one percent of a difference, you will likely lose any benefit due to high closing costs.

For those who need a lower payment, lower interest rate or help with other debts, it can be beneficial if you refinance. Your lender can provide you with advice regarding all aspects of refinancing terms and to determine if it makes sense to move forward with your financial situation.