Should I refinance my mortgage? If you’re wondering about this, then you’re not alone. It’s a question that many homeowners find themselves asking. Ultimately, whether it’s a good decision depends on your reasons for refinancing and your situation.
Should I Refinance My Mortgage?
When you refinance your home loan, you replace your existing home loan with a brand-new loan. This new loan comes with a new interest rate and new terms. It also comes with a price tag. Since the process isn’t free, you’ll need to consider both what you hope to achieve by refinancing and the cost of refinancing carefully. Then, you can decide if proceeding with refinancing is a smart choice.
Reason to Refinance #1: Get a Lower Interest Rate
Snagging a lower interest rate can reduce the cost of borrowing. How much lower is worth it? You’ll need to run the numbers to be sure, but the general rule of thumb is that refinancing is a good idea if you can lower your interest rate by one percent or more, according to Investopedia.
Reason to Refinance #2: Get a Lower Mortgage Payment
As Better points out, a desire for lower monthly payments can be a driving factor for refinancing. Securing a lower interest rate will generally help lower your payment too. However, if you really need extra breathing room in your budget, you may choose to refinance into a longer term. Extending the life of your mortgage will ultimately cost you more in interest, but it will allow you to pay less each month.
Reason to Refinance #3: Get Rid of Mortgage Insurance
Private mortgage insurance protects your lender, but it can add hundreds of dollars to your expenses. With a conventional loan, you could cancel PMI once the mortgage falls below 80 percent of the home’s value. As NerdWallet reports, refinancing may allow you to do away with PMI sooner. If you have an FHA loan, you’re stuck with mortgage insurance for the life of the loan. The only way to get rid of the insurance is to refinance into another kind of loan.
Reason to Refinance #4: Switch to a Fixed-Rate or Adjustable-Rate Loan
As Investopedia notes, refinancing can be a useful way to change between fixed-rate and adjustable-rate mortgages (ARMs). If you’re a homeowner with an ARM who is worried about rising rates or uncomfortable with unpredictability, you might choose to refinance so that you can switch to a steady fixed-rate loan. On the other hand, if interest rates are falling, you might consider the potential savings worth the risk of trading your fixed-rate mortgage for an ARM.
Reason to Refinance #5: Access Home Equity
Tapping into your home equity is a popular reason to refinance. As The Mortgage Reports indicates, a cash-out refinance can be used to get extra cash for making home improvements, paying down debts, going to school, investing, starting a business, and other activities. The cash you receive can be used for any purpose, but it’s best to use it wisely because the obligation is tied to your home.
When Refinancing Your Home Loan Makes Financial Sense
Should I refinance my mortgage? When you’re considering that question, it’s important to weigh the financial pros and cons. As Forbes notes, refinancing has the potential to bring both short-term and long-term financial savings. By securing a lower interest rate and getting rid of mortgage insurance, you may be able to reduce your monthly payment and overall costs of borrowing. However, there are costs involved in refinancing. These include the origination fee, appraisal fee, title insurance fee, and credit report fee, and they typically total between two and six percent of the amount borrowed. To determine if refinancing makes sense from a financial perspective, it helps to calculate the break-even point. This is the point where your savings from the refinancing surpass its costs. To figure it out, tally up your closing costs. Then, divide them by the amount you save each month as a result of your new payment. This should reveal how many months it will take you to recoup the costs of your refinancing.