As the mortgage rates have been trending down in 2019, more homeowners may be looking to refinance their loans. This is a move that may save you money on your current monthly payments or even create some extra cash to go towards home improvements. Regardless of how long you have been in your current mortgage, a refinance should be taken with careful considerations. Make sure it makes sense. You will have to pay fee’s and go through the approval process again so it is important to have a clear goal of where you want to be financially after you finish the refinance. Is a refinance right for you?
Good Reasons to Refinance
Rate and Term
- This is the most common refinance, it is meant to lower interest rate and monthly payment. A homeowner with a higher rate should do this if they are able to reduce their rate by at least 0.5%. Over the long run, it can save thousands.
- If you have an ARM (Adjustable-Rate Mortgage), switching to a fixed-rate mortgage could make a ton of sense or vice versa. ARM’s usually start out offering lower rates than a Fixed-Rate Mortgage. Over time, you should pay attention to rate trends. If the rate has decreased since getting your loan, it is best to switch from the ARM to a Fixed-Rate mortgage which will result in a lower interest rate and end concerns over possible future interest rate increases.
- If you are converting to an ARM, it would be a good idea for someone who is not planning on staying in their home for the long-term. When interest rates are falling, you can reduce your loan’s interest rate and monthly payment without the worry of interest rates to start rising.
- This is a refinance where you lower the term of your mortgage, say from 30 years to 15.
- Shorter-term mortgages usually have a lower interest rate than long-term because you are paying the loan back in less time. If you decide to switch from long-term to short-term, you will lower your interest rate but your monthly payment will probably go up. In this situation, make sure that the increase in monthly payment does not significantly hurt you financially.
Cash Out Refinance
- A cash-out refinance is when you refinance your existing loan, the new loan amount is larger than the existing amount, and the borrower gets the difference between the two loans in cash. This is usually done to turn the equity they have built up into cash.
- Similarly to regular refinances, you will have to pay closing costs. You will also have to pay interest on the cash you get out, on top of the mortgage amount you already have. Benefits of a cash out are to pay off high interest rate credit cards, much needed home repairs/upgrades, or other untimely expenses like medical bills.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: What are my goals? How long do I plan to continue living in the house? How much money will I save by refinancing?