Refinancing your home can save you money-or cost money. Learn the difference.
Refinancing can cost between 3% and 6% of a loan’s principal. Also, it will require original mortgage, an appraisal, and title search and application fee. It’s important for a homeowner to decide carefully whether refinancing will prove to be a smart financial decision.
Refinancing a home loan means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance; to obtain a shorter or longer term of mortgage, to obtain a lower interest rate, to convert from adjustable rate mortgage to fixed rate mortgage or vice versa, to consider debt and many more.
Refinancing can save tens of thousands of dollars in interest and years of mortgage debt repayment. But it takes effort and time to start the process. However, the time and effort could be worth it depending on your situation. Here, we have gathered few reasons to consider refinancing your home loan.
- To shorten the loan term
If your home is financed at a higher interest rate, consider refinancing it to decrease the loan term. You can also avail it with a meager change in monthly payment. For example, 30 year mortgage rates are more expensive than a 15 year loan rate. Refinancing will save you money just by taking the time to fill out the necessary paperwork and gather the needed documents.
- To lower the interest rate
You can also consider refinancing to lower the interest rate. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. It can downsize your monthly payment. As of now, 30 year mortgage rates are hovering above 3% and 15 year loans can be secured for lower interest rates. May be the time is right for you to get your loans fixed.
- To lower your payment
When you are refinancing your home loan for lower interest rates, you can drastically reduce your payment and save hundreds of dollars per month. The saved money can be invested or used elsewhere.
- From ARM to FRM and vice versa
If you are refinancing your home, consider switching from adjustable-rate mortgage to fixed-rate mortgage. Fixed rate mortgage can protect you from rising interest rates. Also, a fixed payment is easier to plan for and budget. You can also move from fixed rate to adjustable rate according to your circumstances.
- To consolidate debt or having an equity
Home refinancing can be a battle that never ends debt. Home owners take the facility of having equity in their homes to cover major expenses such as the cost of home renovation or child’s education. Also, a key point to remember is that the interest on mortgages is tax deductible.
It is also a common practice in home owners that they do refinancing to consolidate their debt. In this way, it becomes easy for them to pay their debt.
- Increasing the loan term
Some people also refinance because they want to increase the loan term as it becomes unbearable for them to pay monthly payments. In such cases, the monthly payment reduces to affordable price. It costs more interest but gives you an advantage for a time-being.
- To go adjustable
Earlier we talked about people moving from ARM to FRM, few individuals often like to move from ARM to ARM. They do this to reset their rate and also reset their fixed-rate period on new ARM. Plenty of wealthy people move from ARM to ARM. This action allows them to take advantage of cheap short term rates.
To avoid a steep monthly payment increase, a home owner might like to fully amortize and leave the IO product as IO period lasts only for 10 years.
- To get cash
May be home owner only want to refinance simply to get cash out of his home.
Perhaps you want some home improvements or buy a second home or any other property, or maybe you want to diversify and move your cash into stock market instead. There can be thousands of reasons.
- To buy someone out
In certain situations, you want to remove someone out of your mortgage or from the title. Then, refinancing can be the best option.
For example, there can be a divorce between a couple or someone wants to remove parents as co-signers. For all the above reasons, you can consider refinancing as an option.
- To integrate many mortgages
Another reason to refinance your home can be consolidating your multiple mortgages (hopefully two) into one. By refinancing, you will be taking benefits of lower interest rates. Many other mortgages have sky-rocketing interest rates but are adjustable. Consolidating into one can be money-saving more.
- To access a specific program
You may also want to refinance because you want to take advantage of a specific program. You fear that it will be gone before you can take it. For example, this could be a program like HARP which allows underwater borrowers to refinance.
If you like the program and see it as a fair trade, you can easily go for refinance.
- Always on the table option
One final reason of refinance is simply because you can. While you can enjoy the benefits of refinance in the present-time, you should go for it. There is never a guarantee whether you will qualify or not for it in the future. You could also face some kind of financial hardship or troubling circumstances in the future. So make it possible to refinance now when you can easily qualify.
At the end, we warn you to consider refinancing decisions carefully as it is a tricky business. You should thoroughly study your needs and act according to your particular situation. With some thorough research and smart planning, refinancing your home could turn out to be the best thing to you and your family.