When To Refinance
You don’t necessarily have to feel stuck if you are paying on a mortgage loan that seems unaffordable, or that may be keeping you from making upgrades and improvements to your property. A refinance may be able to change your situation, if you shop for a refinance carefully and take a close, alert look at your long-term situation.
When is the best time to make your move? Keep an eye on interest rates. When they begin to decrease, that may be the time to apply for a refinance. Of course, like anything else, it could be a risk. You never know how low the interest rate will go, and when it will reverse and begin to increase.
Lower interest rates may allow you to shorten the term of your mortgage and ultimately pay less in interest payments. This move could save you up to thousands of dollars during the life of the loan.
Which type of loan to choose when you refinance? You most commonly have two options: a fixed-rate mortgage and an adjustable-rate mortgage. It depends on your plans: how good (and affordable) are the rates? Will you be staying in your home long enough to make the switch worth it?
When refinancing to tap equity: careful! It’s still a loan that needs to be repaid, and you can find yourself deeper in a debt trap if you don’t have a solid long-term plan for the use and repayment of the money.
When refinancing to consolidate debt: good idea, as long as you can successfully calculate a better interest rate and monthly payments that allow you to breathe. Try not to bring on more debt — that move could just deepen your burden.
When you refinance a home mortgage, you are essentially paying off an existing loan and replacing it with a new one (therefore, new financing).
Reasons this would make sense:
- To obtain a lower interest rate (this is often the most common reason)
- To shorten the term of your mortgage (and pay it off quicker)
- To convert to a different type of mortgage (usually fixed rate or adjustable rate)
- To access your home equity in order to pay for something big, remodel, or consolidate your debt
Another refinancing benefit: when you reduce your interest rate, you can be simultaneously building more equity in your home.
Even if you refinance at a lower rate and the monthly payment doesn’t change much, you may still have a much shorter repayment term, and that’s still in your favor.
Be warned: refinancing your mortgage loan is not necessarily free. There is a charge for the transaction, and it can run as much as 3% to 6% of your loan’s principal. It also usually requires an appraisal, title search and application fees. Make sure you can afford this move and will be satisfied long-term with this decision.
Consider refinancing your mortgage loan if your goal is to reduce your monthly payment, shorten the term of your loan, help build equity or consolidate your debt. However, before you take the plunge, take a close look at your personal finances, as well as the new interest rate you will be carrying. Calculate how much money you will save month to month, and over the course of the loan.