Record-low interest rates are leading many homeowners to consider refinancing their homes. Refinancing can help some homeowners save money, build equity, and pay off their mortgage faster, but it’s not the best financial decision for every single homeowner. Ask these questions to determine if refinancing is right for you.
#1- Why do you want to refinance?
Explore the reason why you are seeking refinancing. If you’re looking into it because it will help you down the path to becoming debt-free, take control of your bills, or become an outright owner of a home, refinancing could make sense.
On the other hand, refinancing to roll all your debt into one payment is not always a wise move. Owners with a tendency to accumulate debt tend to build more after they’ve lumped all their debt into a single payment.
Some homeowners refinance to gain access to the equity in their home to cover expenses like college education or home remodeling. Again, that’s going into debt for more debt, which can be a risky situation.
Walk into your refinancing with a clear goal that places you on stronger footing, like build equity, lower payments, or shorter loan terms.
#2- What’s your current interest rate?
The traditional rule of thumb to see if refinancing is a good idea if you can lower your current interest rate by 1 to 2%. Reducing your interest rate by this much will help you save money while increasing the amount of equity building in your home. It can also help you reduce your monthly mortgage payment.
Any amount under 1% may not be enough to justify a rate reduction. However, if you have private mortgage insurance, you could take advantage of appreciation and equity to get rid of this extra payment, especially if PMI is rolled into your loan.
#3- Do you have an adjustable-rate mortgage (ARM)?
ARMs are attractive because they typically start with a lower interest rate and monthly payment. This golden period won’t last forever. Your interest rates will begin to fluctuate and rise over time. Moving to a fixed rate locks in a lower interest rate and adds predictability to your monthly housing payment.
#4- How long is your mortgage term?
Moving from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage could help you build up equity in your home faster and get you closer to your goal of being an outright homeowner.
If this is your reason for refinancing, look carefully to see if the current 15-year rates are competitive with the 30-year fixed rates. Moving from 30 to 15 years just to get a shorter term might actually cost you more. It may be better to keep the 30-year mortgage and make additional payments on the principal to shorten your payment schedule.
#5- How long have you been in the home?
If you have been in the property for less than three years, it may not be reasonable to try refinancing at this time. That’s because refinancing comes with closing costs that can run you thousands of dollars. After initiating your recent home purchase and paying for those closing costs, it may not be the wisest route financially to spend thousands to create a new loan.
On the flip side, if you have been in the home for a substantial amount of time, such as ten or more years, then see if refinancing will have some other kind of financial benefit. You reach a certain point where it may be better to make extra payments on the principal than refinancing to a shorter loan term.
#6- How is your personal financing?
One reason to seek refinancing is if your credit score or debt-to-income ratio has improved to the point where you can secure a significantly lower rate than when you originally bought the home. Again, this is a situation where you want to see 1 to 2% improvement on your mortgage rate to gain the most benefit.
Your financial situation could have also changed so you need to lower the payments. Refinancing may allow you to continue living in the home. Some refinancing programs will roll the closing costs into the terms, making this an affordable option for you.
Make the best out of refinancing
If refinancing can boost your confidence and help you take control of your debts, it can be a great option for you. Make sure you talk about the potential refinancing to find the right rate in terms that will help you meet your financial goals.
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