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To Refinance or Not to Refinance – That is the Question

To Refinance or Not to Refinance – That is the Question

Refinancing your home is like the government.

Sometimes it makes sense.

Sometimes it doesn’t.

And sometimes it will force you to spend a lot of money with little or no return.

Doesn’t that remind you of the government?

So, when does it make sense to refinance?

There are ways to figure that out and there are some things you need to know about refinancing…

Refinancing Explained

Refinancing is the process of taking out a new loan to pay your existing loan.

Refinance old house

Refinance, sell or condemn? That is the question.

There are several reasons for this:

  • Lowering your interest rate
  • Shortening the term of your mortgage
  • Switching one type of mortgage to another
  • Retrieving some of your home equity
  • Possibly even debt consolidation

But, wait! It doesn’t come free…or even cheap, really.

There are costs associated with refinancing, such as:

  • Appraisal fees
  • Application and processing fees
  • Title search fee
  • A percentage of the loan’s principle

Like I said, it’s not always cheap. But…it’s often worth it.

Lowering Your Interest Rate

When seeking to lower your interest rate, you need to make sure that the change is enough to be worth it.

Lower interest rate

Refinancing companies will usually run your numbers and tell you whether or not it is best for you, but it’s best to know for yourself.

Use the calculator below to figure out how much money you will save with your new interest rate. Weigh that against the estimated closing costs for refinancing. Make your decision.

Even a 1% drop in your interest rate can make a huge difference.

Shortening the Term

Generally, the shorter the loan, the lower the interest rate. This is typically a win – win.

As long as you can afford the monthly payments and everything else makes sense, you should go for the shorter mortgage, even if it requires you to refinance.

It is easy to pay off a 30 year mortgage in 15 years, but it’s easier not to.

That’s why most people don’t do it.

Shorter term mortgage

Go for the smaller coconut…I mean mortgage. Are you suggesting coconuts migrate? What?

If the interest rate is higher or the same, you will need to run the numbers.

If interest rates are down and you are locked in at a higher rate, you may even be able to shorten your mortgage without changing your payment.

Shortening your term makes much more sense in the earlier years than the later years, but once you run the numbers, you will know if it works for you.

Switching Loan Types

If you have a “creative financing” type of loan, such as an adjustable-rate mortgage (ARM), switching to a fixed-rate mortgage is a good idea.

At a minimum, you are reducing the risk of having interest rates skyrocket.

Creative financing can be very risky, so make sure you know what you are doing if you decide to use it.

Halt the mortgage crisis

Creative financing was going great…all the way to bankruptcy.

Don’t fall into the trap of thinking that creative financing is the only way you can afford a home in your area. If that’s the case, you can’t afford to live there.

Tapping Into Home Equity

Not a good idea.

If you need to borrow money from your home equity, you can’t afford what you are buying.

As far as emergencies, use an emergency fund.

Running the Numbers

Basically, you should run the numbers to see if a refinance makes sense for you.

Hopefully you have a better understanding of what to look for, but just to make it easier, here is a refinance calculator:

Refinance Calculator

You have everything you need to make the decision. Now get to it!

Have you ever refinanced?

Are you planning to?

Share in the comments!

Photo Credit: The Huntington, Universal Pops, FutUndBeidl, Rain Rannu, Thienzieyung

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My name is Kalen and I'm the founder and main finance writer for MoneyMiniBlog. I write short, sweet and simple articles on money and productivity. My awesome wife and I have 4 amazing children. I also serve on active duty in the United States Air Force. Feel free to ask me anything.

12 Comments

  1. I was a sales assistant for a mortgage rep for five years and it was amazing how much cash we saved people by convincing them to refi. It was also amazing how many people wanted to refi simply based on the rate when it was clear they weren’t going to save much of anything at all, based either on their low mortgage amount or the fact that they’d be selling within 5 years. Great and thorough post here, Kalen!
    Laurie @thefrugalfarmer recently posted…Cutco Cutlery: A ReviewMy Profile

    Reply
    • Hey Laurie,

      I didn’t know you used to work for a mortgage rep. That’s awesome! It really is great how much people can save, but like you said, some people just “hear it’s a good idea” and they don’t actually run the numbers.

      Thanks so much for commenting!

      Reply
    • Hey Holly,

      You’re so right! It can be a pain, but after you calculate that you should do it, it’s worth it! It can most definitely be a pain lol

      Thanks for commenting!

      Reply
  2. I’ve never refinanced because I’ve never owned a home. I’m a renter so far, just not ready for a mortgage. Great tips on refinancing though…Although I’ve never done it, I worked at a financial help firm in Florida for a while and refi’s were a big part of the training! Thanks for the great read!
    Josh @ CNAFinance.com recently posted…Teaching Your Kids About MoneyMy Profile

    Reply
    • Hey Josh!

      Thank you sir! That’s great that they taught you about refinancing. It can help some people by leaps and bounds.

      Thanks for commenting, brother!

      Reply
        • Hey Josh,

          Yes sir! It really can make a huge difference. I’ve seen it do wonders for people.

          Thanks for commenting!

          Reply
  3. My mother refinanced our home and it’s all worth it! At first, the pain through it all is very high but when you came into there, it was totally worthy.

    Reply
    • Hey Hannah,

      It can definitely be worth it! That’s great that your mother benefited from refinancing. It can help quite a bit sometimes.

      Reply
  4. Hi Kalen

    I’ve got the T-shirt on refinancing about how what not to do with refinancing. We’ve done it at least 4 times:
    1 – we put in a pool and added on to the mortgage – justification was because we wanted the pool while the kid were still young
    2 – consumer debt piled up and mortgage rates had dropped so we piled the debt onto the mortgage when we refinanced
    3 – ditto but the problem was that we kept our mortgage payments high but didn’t manage against a budget so although mortgage was coming down, HELOC and eventually other forms of credit went up
    4 – again – this was our debt crisis turning point and happened two years ago.

    Ya, it has been that bad.
    debt debs recently posted…Worth It Wednesday – Can a Marriage Survive a Debt Crisis?My Profile

    Reply
    • Hey!

      I have been through tough times like that. I’m glad to hear you had a turning point! It’s nice to have a plan and get on track and it seems like that’s what you guys are doing. I assume things are going better now?

      Thanks for the comment!

      Reply

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