The question of refinancing a house is to be weighed seriously, without knowing with assurance that this could indeed save some money rather than being a waste of time and efforts.
In this post, we look at what refinancing entails, why one may opt for it, and also see how to decide on refinancing your mortgage.
Table of Contents
What is Mortgage Refinancing?
First things first. Refinancing of a mortgage means replacing your present mortgage with a new one, generally with different terms.
When you refinance, you take a new loan, with which you pay off the previous one. This new loan can be with a different interest rate, loan term, or maybe even a different lender.
One could ask, “Why would anyone want to go through the hassle of refinancing?” Well, there are a number of reasons why refinancing just might be something that will make sense for you.
Why Consider Refinancing?
- Lower Your Interest Rate One of the most common reasons people refinance their homes is to lock in a lower interest rate. If rates have fallen since you originally took out your mortgage, refinancing could lower your monthly payments and save you a great deal of money over the life of the loan. For instance, say you took out a 30-year mortgage at 5% interest. Now, those interest rates have come down to 3.5%. You can save hundreds of dollars a month with refinancing. That’s much better spent elsewhere: paying off debt, building up retirement savings, you name it.
- Shorten Your Loan Term If you are in a better financial position than when you initially took out a mortgage, refinancing to shorten the term of your loan might be a good idea for you. For instance, switching to a 15-year mortgage from a 30-year mortgage will allow you to pay off your house sooner. Your month-to-month payments rise, yet you pay far less interest overall. You also get the satisfaction of owning your home free and clear sooner.
- Switch from an Adjustable-Rate to a Fixed-Rate Mortgage Do you have an ARM? If so, you’re likely concerned about increasing interest rates. Refinancing into a fixed-rate loan offers peace of mind by locking in a stable rate for the life of your loan. That means no more concerns about your monthly payments suddenly increasing. You know exactly what to expect each month, which makes budgeting a whole lot easier.
- Leverage the Equity in Your Home Need cash for home renovations, doctor visits, or to pay off a lot of high-interest credit card debt? Refinancing lets you tap into your home equity through a cash-out refinance. You refinance for more than you owe on it, taking the difference. Just keep in mind, this can be a helpful tool but it also increases your loan balance, so use it wisely.
Is Now the Right Time to Refinance?
Now that you know why refinancing might be in your best interest, the next question is: “Is now the right time?” The answer depends on several factors:
- Current Interest Rates Interest rates play a huge role in determining whether refinancing makes sense. If rates are significantly lower now than at the time of originating your mortgage, it may be a good time to refinance.
- Your Credit Score Your credit score can impact the interest rate you’re offered. If your credit has improved since you took out your mortgage, you may qualify for a lower rate. However, if your credit score has fallen since then, you will not get the best rates, and refinancing could end up costing you more over time.
- How Long You Plan on Staying in Your Home Will you be moving anytime soon? If you are, it may not be worth refinancing. Refinancing involves closing costs and fees that take a couple of years to break even through savings from a lower interest rate. If you don’t plan on staying in your home for at least a few more years, the costs might outweigh the benefits.
- Your Current Loan Balance The amount you still owe on your mortgage can also affect your decision to refinance. If you’re within spitting distance of being able to pay off your mortgage, refinancing doesn’t really make a lot of sense. But if you’re early in the term, refinancing can save you tons.
- Costs to Refinance Refinancing isn’t free. You’ll have to look into closing costs, which range from 2% to 5% of the loan amount. Just do the math and determine whether the long-term savings is worth the up-front costs.
The Refinancing Process
If you decide refinancing is what you need to do, here is what you might expect from the process:
- Shop Around for Lenders Do not rush with the very first lender that comes your way. Your ability for shopping around can get you the best deal.
- Apply with a Lender Once you have narrowed down the list of lenders you want to work with, you’ll be required to make an application with financial documents such as tax returns, paystubs, and bank statements.
- Order an Appraisal An appraisal, required in most cases by lenders, is essentially an assessment for determining the current market value of your home.
- Close on the Loan You will close on your new loan and pay all the associated closing costs if your application receives approval. At this point, payments will also begin on your new mortgage.
Conclusion
Is this the best time to refinance your mortgage? It really depends upon one’s situation. Think of your financial goals, the current interest rates, and how long you plan to stay in your home.
Refinancing is a good way to save cash, pay off your mortgage faster, or tap into equity if the numbers add up.
Refinancing is a huge decision; one should invest necessary time in weighing options or seeking a financial advisor in cases of uncertainty. Done correctly, refinancing could be a strong tool in helping an individual reach their financial goals.
