If you own a home and have a mortgage on the property, it’s smart to stay on top of your financial situation and keep an eye on shifts in the economy, movement in interest rates, and nearby property values. As you study these things, you’ll inevitably be faced with a dilemma at one point or another: to refinance or not.
“In simple terms, refinancing is the process of swapping loans and moving debt to a different lender or loan,” Green Residential explains. “In other words, you have your existing loan and you apply for a new loan. The new loan pays off the existing loan and you’re now obligated to fulfill the requirements of the new loan.”
While this sounds simple enough, there are actually a bunch of interconnected factors in play that make the decision tougher than it seems on the surface.
4 Reasons for Refinancing
Refinancing is a popular topic among homeowners – and rightly so. In many situations, it yields a number of key benefits and can actually save thousands of dollars over the life of a loan. So, before going any further, let’s check out some of the specific factors that make refinancing a smart idea.
- Lower Interest Rate
This is pretty obvious, but the number one reason to refinance is to lower your interest rate. Over the course of 15 or 30 years, shaving even a quarter of a percentage off your rate will save you thousands of dollars. So, if you can get a lower rate than you already have, don’t delay.
- Lower Monthly Payment
If you’re able to lower your interest rate, you’ll likely also be able to lower your monthly payment. For many families, shedding just $100 per month can make a big difference in their budgets.
- Greater Security
If you currently have an adjustable rate mortgage (ARM), you’re at the mercy of the marketplace. After the introduction period (often 5 or 10 years), your rate can increase each year (up to a maximum). In a market where rates are expected to rise considerably, it may be smart to lock into a fixed rate now.
- Need Cash
While most people decide to roll all of their existing home equity over into the next loan, it is possible to get a mortgage for a higher amount and then take out some of the equity you’ve built up over the years. In an emergency situation, this can provide you with a lot of cash.
3 Reasons to Stay Put
While a refinance sounds pretty attractive at this point, it doesn’t always make sense. There are plenty of situations in which it makes much more sense to stay put and keep the mortgage you currently have.
Here are a few of the top reasons.
- Refinancing Costs
Refinancing isn’t cheap. On a $200,000 mortgage, the average closing costs and fees could be anywhere from $3,000 to $4,000. Keep this in mind as you think about refinancing.
- Ready to Move
If you’re going to be moving any time within the next five years, it doesn’t sense to refinance. You’ll have to go through the process all over again when you move, so you’re essentially throwing money down the drain.
- Already Low Rate
Finally, if you were one of the lucky ones who locked in with a low interest rate a few years ago, you have no reason to refinance. Rates are only going up and you might as well enjoy the savings.
Evaluate Your Situation
Deciding whether to refinance or stay put isn’t always as cut and dry as you’d like it to be. Spend some time evaluating your current financial situation and remove your emotions from the situation. Make a list of pros and cons and see which one wins.