If you are a homeowner, at one point or the other during the life of your mortgage, you may find yourself thinking about refinancing your mortgage. The promise to save yourself thousands in mortgage payments is definitely tempting, especially when interest rates are low. But when should you refinance your mortgage? And do you really need to?
Low-interest rate environments make refinancing an attractive opportunity for some. But is refinancing right for you? Let’s dive into the details.
What is refinancing?
First things first, let’s talk about what refinancing actually means. Essentially refinancing allows you to pay off a current loan by taking out a new one with ideally more favorable terms. But your debt is not eliminated.
Usually, you’ll seek out a lower interest rate or a lower monthly payment. In some cases, you may even choose to pull cash out when you refinance.
In most cases, your refinancing options are limited to large loans. A common opportunity for refinancing is with your home’s mortgage. But you can also refinance other loans such as your student loans.
How can refinancing help your finances?
If refinancing doesn’t eliminate your debt, then why do so many people choose to take advantage of this opportunity? Here are is more detail on the top ways that refinancing can help your financial situation.
Lower interest rate
The biggest perk of refinancing is that you have the opportunity to secure a lower interest rate. In fact, if you aren’t able to secure a lower interest rate through refinancing then it may not be worth the effort.
With a lower interest rate attached to your debt, you’ll pay less in interest over the lifetime of the loan. In the case of a mortgage, you could stand to save several thousand dollars on your loan if you are able to shave off a percentage point on your interest rate.
The less interest you pay over the life of your loan, the better your financial situation can be. You’ll have the opportunity to put more funds towards your other financial goals beyond simply becoming debt-free.
Lower monthly payments
Beyond a lower cost over the course of the loan, you could also lock in lower monthly payments.
You can do this by taking advantage of a lower interest rate or a longer loan term. Either way, you’ll have more breathing room in your monthly budget.
You’ve taken the time to build equity in your home. But what if you are in need of cash right now? That’s when a cash-out refinance can come in handy.
But it is important to know the risks before applying for a cash-out refinance. This is because you are essentially taking on more debt. Although you might enjoy the extra cash right now, adding more debt to your financial obligations is usually not a great option.
If you need cash now, then consider starting a side hustle or selling extra stuff around the house before making this major financial move. A cash-out refinancing could help you manage current financial pressures, but you’ll be faced with more debt to pay off over time.
Ability to pay off your home sooner
A lower interest rates means that your monthly payment could also be less. However, this could be the perfect opportunity to put your the money you save towards paying off your mortgage early.
Basically, you'd apply the extra funds you have directly to your prinicipal balance. Not only can this reduce the life of your mortgage, it can save you thousands of dollars as well.
When should your refinance your mortgage?
So, is refinancing a good idea? Unfortunately, the answer will depend on your unique situation.
The first factor to consider is the interest rate opportunities. If you can get a lower interest rate, then refinancing might be a good idea. Or if you are able to lock in a low fixed interest on your loan instead of an unstable rate, then it could be a good opportunity.
The second factor is whether or not you have the ability to shorten your loan term. If you want to get out of debt more quickly, then refinancing to a shorter loan term can help. But the other option is to simply make extra payments to your debt to eliminate it on a schedule that works for you.
If you are able to secure a lower interest rate with a monthly payment that suits your budget, then refinancing is something that you should consider. But make sure to weigh the costs of refinancing before moving forward.
What are the costs of refinancing?
Although refinancing can save you money on interest charges, the upfront costs to refinance your mortgage can be hefty. Typically, the closing costs of a refinancing arrangement are similar to the closing costs of buying your home. With that, the fees can add up quickly. In fact, the average closing costs on a refinance are $5,000 according to Freddie Mac.
A few fees to be aware of include:
- The application cost
- Government recording costs
- Origination fees
- Attorney fees
- Any inspection costs
- Related closing fees
Depending on the lender you choose to work with, the costs of refinancing can easily be thousands of dollars.
In addition to the monetary cost, the process of refinancing can be time consuming and paperwork intensive. With that, you should consider your time costs when considering refinancing. Don’t move forward unless you are willing to commit several hours to this process.
Once you determine the costs of refinancing, weigh it against the costs associated with your current mortgage. How much are you able to save by refinancing? Are you even able to save money at all, or will refinancing be a break-even proposition? Weighing out the costs can make your decision easier.
How to refinance
If refinancing sounds like a good opportunity, then start by shopping around. Don’t just work with the first lender you find. Otherwise, you might not be saving as much as you could.
Instead of receiving quotes from several lenders, consider using a platform like Credible to accelerate your search. You can search through several lenders quickly with their easy to use the search tool. With a few minutes of your time, you’ll find the best offers available for your situation. Plus, it is absolutely free to use Credible. Why not take advantage of this free refinancing comparison tool?
As you shop around, compare interest rates and loan terms across lenders. Pay close attention to any fees associated with your loan. Otherwise, you could be in for an unpleasant surprise later on.
Once you are satisfied with your loan option, take action and apply for the refinance. Don’t sit on your attractive offer for too long. Move forward when you find the loan opportunity that fits your financial future.
Should I refinance my mortgage now?
Refinancing your mortgage can be a great opportunity to change your financial situation. However, moving forward with a mortgage refinance is not the best option for everyone.
The final decision is based on your personal finances and long-term financial goals. If you have the ability to lower your interest payment obligations, then you could save yourself thousands. But if the upfront costs are too high, then refinancing may not make sense.
As you make this decision consider your mortgage and how much you could save. Weigh those savings against the costs of a refinance. If you are able to save money, then refinancing could be a good option for your financial future. Otherwise, it is likely an unnecessary paperwork minefield.