When to Refinance Your Mortgage

Mortgage refinancing is about paying off a current loan and replacing it with a new one. Lots of homeowners choose to refinance due to the following reasons:

• To shorten the mortgage term
• To attain decreased interest rates
• To change from (ARM) Adjustable-Rate Mortgage to the (FRM) Fixed-Rate mortgage
• To raise funds by tapping home equity and deal with consolidated debts, financial emergency, or finance a large purchase.

Since the cost of refinancing a loan’s principal ranges from 2%-5%- the same as the original mortgage, it requires title search, an appraisal, and application fees. These are important to help a homeowner determine if it’s a wise choice to do refinancing.

Key Points:

• When there is a drop in interest rates, refinancing can be considered to shorten the mortgage’s term, as well as to pay lesser interest payments.
• In refinance, a mortgage with low-interest rates is the best choice.
• Consolidating debt or tapping home equity are some reasons to do a refinance but still can worsen problems related to debts.
• Coming from a fixed-rate mortgage to an adjustable-rate one helps in planning the time to remain at home and rates.

Refinancing for Secured and Lower Interest Rates

Lower interest rates are considered to be one of the choices taken advantage of by homeowners for them to do refinancing. Historically speaking, the rule of thumb states the refinancing is good if the interest rates are reduced to 2%. However, lots of lenders are saying that 1% as the savings is already enough to refinance.

Reducing interest rates can help in saving money, as well as to increase rates to build the home’s equity. It can also help in reducing the monthly size of payments. One example of that is when a 30-year old fixed-rate mortgage that has 5.5% on a $100,000 home interest rate has an interest and principal payment of $568. In this loan, it can reduce the payment to $477 at 4.1%.

Reduce Loan’s Term through Refinancing

When there are drops in interest rates, homeowners can take it as a chance to refinance an existing loan in exchange for a new one. Here, monthly payments will not have too many changes and can shorten the term.

For example, when a 30-year old fixed-rate mortgage on a home costing $100,000, doing refinance from 9% to 5.5% can help cut the term into two to make it only 15 years and have minimal changes on monthly payments to $817 from its original price which is $805. But, if you’re currently at $568 or 5.5% for 30 years, taking 15 years mortgage with 3.5% can increase payments to $715.

Consolidate Debts or Tap Home Equity with Refinancing

It is previously mentioned that the reasons to refinance are financially sound, yet it can be slippery to the never-ending debt slopes.

To cover major expenses is the main reason why homeowners access their home’s equity. It can be a child’s college education or home remodeling. These homeowners justify the act of refinancing by claiming that remodeling can provide additional value to the home, as well as mortgage loans have lesser interest rates than borrowing money from another source. Another claim justifying this is that there is a tax-deductible interest on mortgages. These claims may be true as it increases the years of having debts on a mortgage, and it is a rare financial decision than spending dollars on interest just to gain a 30-cent tax deduction. Also, take note that the Tax Cut and Jobs Act became effective, and it brought deduction of interests in a loan size from $1 million down to $750,000 only if the house was bought after Dec. 15, 2017.

On the other hand, lots of homeowners do consolidate their debts since it is considered a good idea to replace a high-interest debt with a lower one at face value. However, refinancing does not guarantee flash financial prudence. This step must be taken only if spending too much can be stopped even with temptations at the front.

The costs of refinancing can take years of recouping the 3% to 6% principal. In this regard, it must be considered to stay with a current plan for more years than taking this step.

Awareness that a large percentage of people who already generated high-interest debts on cars, bags, credit cards, and other purchases can only repeat once their credit became available once again must be raised. This brings an instant quadruple loss full of wasted refinancing fees, lost house equity, increased number of years to pay a new mortgage’s interest rates, and return of high-interest rates when credit cards are maxed again. All of these can result in a debt cycle in an endless perpetuation and, eventually, to bankruptcy.

Another thing, refinancing is a serious financial emergency. Whenever this is the case, searching carefully for all other options to raise funds before doing this must be done. If cash-out refinancing is chosen, high-interest rates will be charged on a new mortgage compared to a rate-and-term one. Here, the money will not be taken out.

Bottom Line

Refinancing is a great move financially only if it helps to reduce mortgage payments, build equity faster, and shorten the loan’s term. Also, once it is used carefully, it can be a valuable tool to bring debts under control. So, before doing refinance, taking a good look at financial situations and potential risks must be done. Here, questions like how much can be saved in refinancing are often raised.

Once again, keep in mind that in a loan’s principal, refinancing costs 25 to %%. It can be years for recouping the cost with generated savings by a shorter term or lower interest rates. So, if staying at home is the final decision for more years, potential savings can only be negated by refinancing costs.

It is also important to remember that a wise homeowner looks for ways to build equity, reduce debt, eliminate mortgage payments, and to save money. These goals will not be reached if taking cash out of home’s equity became the final decision.

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