What is Refinancing and When Should I Do It?
Whenever interest rates fall, you’ll be bombarded by ads offering great deals on refinancing. Refinancing is the act of modifying your mortgage, sometimes starting over, or recreating it with new terms. On occasion, refinancing can be a way to take advantage of lower interest rates.
Sometimes this can be a great way for you to save money by reducing your monthly mortgage payment, reducing the term of your mortgage, or if you’re very lucky, both. If you’re wondering if now is a good time to refinance, let us walk you through some of the things you should keep in mind before running your credit and committing to a new loan.
Start by looking at the market.
Have rates gone up or down since you purchased your home? Do you even know what the interest rate is on your loan? You can usually find this information on your most recent mortgage statement. If rates have gone up, it may be a bad time for a re-fi as you’ll be paying more interest on your loan each month.
You also want to consider how much you owe.
If you put down 20% or more and rates have dropped since you got the keys to your new home, it might likely make sense to explore your options for refinancing. If you have less than 20% equity, it might be easier to refinance than you thought.
When does it make sense to refinance?
There are a number of situations where refinancing can make a lot of sense:
Did you get lucky?
If your monthly income has increased as a result of a new job, promotion, or secondary source of income, you might consider refinancing to reduce the term of your mortgage. If you purchased your home with a 30-year mortgage, refinancing to a shorter term will save you money in the long run, even if your monthly payment increases.
If purchasing your home was only possible with PMI (private mortgage insurance) then refinancing once you have enough equity to do so often makes sense. In some cases, your monthly payment won’t change much, but you’re paying down more of the principal on the loan each month, meaning you’re building more equity.
Taking a cash-out refinance loan to consolidate debt borrow money for an unexpected home repair or medical bill can be an additional option. While this is a possibility, it’s going to reset any equity you’ve built in your home, which you should keep in mind when you come to sell.
Think about how long you’re actually going to be in your home. If you bought your house last year with a 30-year fixed loan but you’re planning to move in the next 3-5 years you might want to consider switching to an adjustable rate mortgage (ARM) to take advantage of a lower rate in the short term.
Getting Married or Divorced?
If you’re going through a change in marital status, a refinance is a good way to add or remove, someone from your home loan. In fact, many lenders will require a re-fi when a marriage ends.
Buying a Second Home?
You may want to use the equity in your current home to buy another property. Perhaps you have found your dream home and want to keep your current property to generate a rental income. Taking a cash-out refinance loan may be an option.