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