When to Refinance Your Mortgage
Refinancing can save you money—or cost money
The definition of Refinancing means to pay off an existing money loan and replacing it with a new loan. One would have to ask why would any one go to the effort and does it help or hurt.
REASONS BY TO REFINANCE
- To obtain a lower interest rate
- To shorten the term of their mortgage
- To lower your monthly payment
- To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa
- To tap into home equity to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt
- It costs money to change a loan
- It may extend the length of your loan
Since refinancing can cost between 3{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} and 6{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} of a loan’s principal and—as with an original mortgage—requires an appraisal, title search, and application fees, it’s important for a homeowner to determine whether refinancing is a wise financial decision.
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292}. However, many lenders say 1{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} savings is enough of an incentive to refinance.
Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 5.5{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} reduces your payment to $477.
REFINANCE TO LOWER YOUR INTEREST RATE
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} to 5.5{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} for 30 years ($568), getting, a 3.5{11512727f4a5fe19bf5493170b96e83c818b1421d7771f73bf609a2014e65292} mortgage for 15 years would raise your payment to $715. So do the math and see what works.
BE SMART AND KNOW YOUR OPTIONS
It pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payment. Taking cash out of your equity when you refinance does not help to achieve any of those goals. Long term fiscal planning, sets you up for secure fiscal future.
