If you’re a homeowner with an existing mortgage, you might think you’re all set. But just because you have a mortgage locked in doesn’t necessarily mean it’s the best mortgage for your situation.
Refinancing is a cost-effective and logical option in many cases, particularly in a market with historically low interest rates.
Refinancing is essentially the process of replacing your existing mortgage on a property with another mortgage that has different and more advantageous terms.
There are a variety of reasons to refinance – and we’ll discuss many of them here in this article – but it’s almost always used as a way to save money. Sometimes those savings come upfront, while other times the savings are gradually realized several years down the road.
The refinancing process isn’t overly complicated in most scenarios, but it does require some intentionality. The first step is to see if you qualify. To do this, you’ll need to meet a few basic requirements.
These requirements vary based on the lender and your individual circumstances, but there’s generally an expectation that you meet certain requirements. Keep these factors in mind as you explore this process in further detail.
Thanks to simple online refinancing tools that make it easy to shop rates and quickly calculate both the short-term and long-term costs, refinancing your mortgage is always an option.
However, there are certain circumstances where it makes more sense than others. It’s up to you to know when to pull the trigger and when to stay put.
Here are a few situations where refinancing is a logical option worthy of further investigation:
A high interest rate loan is the most obvious reason to refinance. If you obtained your mortgage at a time when rates were higher than they are today – or if you had challenging financial circumstances that prevented you from getting a favorable rate – refinancing could save you a decent amount on your monthly payment. (Not to mention significant interest savings over the life of your loan.)
The general rule of thumb is that you should refinance if you’re able to reduce your interest rate by at least 2 percent. However, in some situations, the ability to lower your interest rate by a single percentage point is enough to justify a refinance.
When refinancing to lower a high interest rate, make sure you also consider the long-term impact and your time horizon of ownership. Refinancing basically resets the payment process. So while you may lower your interest rate, you’re also slowing down the rate at which you’re able to build equity. And if you’re also extending the length of the mortgage, you could ultimately pay more over the life of the loan. Just keep these factors in mind! There is also the option to pay down your mortgage early.
Adjustable rate mortgages (ARMs) are very attractive to first-time homebuyers and other individuals who want a low rate (but may not otherwise qualify for a low rate on a traditional loan). But as time passes, many homeowners become leery of getting stuck with an adjustable rate – particularly when interest rates are low and they have nowhere to go but up.
With an ARM loan, the homeowner carries all of the risk of rising interest rates. And though there are rules and limitations on how and when a lender can increase your rate, there’s always the risk that rates rise and you get stuck in a high-interest environment.
In many cases, refinancing to a fixed-rate mortgage is a smart move. It provides some stability and transfers that “risk” back to the lender. If nothing else, it gives you peace of mind and predictability with your finances.
Some will disagree with this, but if you currently have a 30-year mortgage, refinancing to a 15-year can save you a significant amount of money in the long run.
In some cases, refinancing from a 30-year to a 15-year will lower your interest rate while simultaneously increasing your monthly payment. That’s because you’re squeezing the loan repayment into a smaller period of time. If you have the cash flow to deal with an increase in monthly payments and plan to be in the house for a long period of time, this works out as a net positive.
In other cases, you might be able to refinance from a high-interest 30-year loan to a lower-interest 15-year loan and still enjoy roughly the same monthly payment. This is the best-case scenario, as it allows you to save now and later.
If you have a major expense or lots of “bad” debt to your name, refinancing and tapping some of your equity could be a choice worth considering. This option is admittedly a risky one for many families but does have its place in the refinancing discussion.
The basic idea with this approach is that you refinance. Also, you simultaneously pull out some of the equity that’s currently in your home. You then use that equity to pay off a higher-interest loan and/or pay for something that would otherwise require you to take a high-interest loan (like a vehicle, upcoming medical bill, or child’s college education). While risky, some people even refinance to fund a business.
This method is often referred to as a cash-out refinance. If you go this route, you should know that many lenders will charge a higher interest rate.
Depending on your circumstances, now may be as good a time as any to begin the process of refinancing your mortgage. The question is, where do you start?
Here are a few steps to consider:
Refinancing to save money is the case in 90 percent of situations. If you’re in this boat as well, just make sure you have a plan for how you’ll use that money. It’s easy to go into the refinancing process with a plan to use your $400 in monthly savings. Additionally, you can use it to invest and build up your retirement nest egg. Just try not to squander the money on frivolous purchases. This ultimately defeats the purpose of refinancing in the first place.
There isn’t necessarily a right or wrong way to use the money you free up in your monthly budget. However, there should be a plan. Without one, the monthly savings will disappear and you’ll be left without a whole lot to show for it.
As this article proves, there are a number of scenarios where refinancing is the right thing to do. Now it’s up to you to make sure you do your due diligence and make a sound financial decision. Essentially, you want this decision to benefit your family and finances for years to come. It’s okay to be unsure about how to proceed. Just remember that it costs nothing to shop around for rates and see what your options are.
Not that long ago in history, bartering was the way of the world. Bartering the exchange…
Despite common sci-fi movie tropes to the contrary, the relationship between robots and humans has…
One of the most simple and popular ways to increase conversations and drive more sales…
If you want to have a stable financial future you need to start building assets.…
Unless you win the lottery, becoming a millionaire takes hard work and patience. However, if…