Weighing Your Refinance Options: Should You Refinance Your Mortgage?
If you’re starting to struggle with paying your mortgage, refinancing may be a way to bring your payments within reach. Refinancing your mortgage means taking out a new loan which satisfies your old one. It leaves you with a new mortgage contract, with a new set of terms and payments that can better fit your current situation.
Whether or not you should explore your refinance options depends on many things, including how long you will be in your home and your personal finances. Before you set out to refinance your home, be sure to work with your lender and do the math to confirm this approach will be in your financial favor.
How long you plan to stay in the house can affect your decision to refinance
Before you decide to refinance your home, you need to make sure you’ll be staying in the home long enough to make the numbers work. Closing costs on a refinance can be significant, so you need to live in the home long enough that each month’s savings helps you recoup those costs. In other words, paying $4,000 in closing costs to lower your payment by $300 per month means you need to live in the house for at least 14 months before you break even – and even longer to start realizing savings. If you move before that, you actually cost yourself more money by refinancing your mortgage.
Your personal financial situation can affect refinance options
Your refinance options may be affected by your current credit score and outstanding debt. If your credit is strong, and you do not have a large amount of outstanding debt, you may be able to obtain a better rate on your refinance. The loan-to-value limits on your property may also affect your refinance, as you may need to have paid off a certain percentage of your mortgage before you can refinance your home. You may also choose to use a refinance to consolidate debt for better interest rates and more manageable payments.
When refinancing may be right for you
There are at least three common reasons that homeowners refinance, though your particular refinance needs may differ. Consider refinancing if:
- You need to lower your monthly payments: This is probably the most popular reason to explore alternative refinance options. If you’re able to find a lower interest rate or refinance your remaining balance into a 25- or 30-year term, this can reduce the size of your mortgage payments. (Note that stretching your payments out by 25 or 30 years may make your monthly payment smaller, but ultimately you’ll pay more in interest over the life of the loan.)
- Your adjustable-rate mortgage (ARM) is about to reset: ARMs offer low mortgage payments for the first three, five or seven years, but at the end of that period, the interest rate adjusts to current levels. It can increase or decrease. If it’s about to increase, refinancing into a lower, fixed-rate mortgage can keep your payments from skyrocketing and provide the peace of mind of having predictable mortgage payments.
- You’d like to pay off your home faster: Should you find yourself in a position to pay more toward your mortgage right now, you may be interested in expediting your payments so you can own your home free and clear. In this case, you may look into refinancing your mortgage into a shorter term with higher monthly payments. You’ll save money in interest and be paid in full sooner.
Deciding whether or not to refinance your home loan is a decision only you can make after consulting with your lender. So, be sure you have a full understanding of the available interest rates and mortgage terms as well as the fees associated with refinancing before you proceed. Should you find that refinancing is a viable option, it can help you save thousands of dollars over the long-term. And, if now isn’t the right time, you can always reconsider this option a few years down the road.