You shouldn’t refinance your mortgage at a lower interest rate before considering all of your options. When it comes to refinancing your mortgage it’s all about the right timing, especially since the drawbacks of refinancing is that it’ll reduce your home’s financial benefit. Taking out a mortgage just because there is a new low mortgage rate on the market isn’t always a good idea, because you must pay a hefty fine for closing costs. In some scenarios it makes sense to refinance your mortgage, while in others it is more beneficial to stick to your current loan.
What is it That You Want to Accomplish?
Before determining whether or not to refinance your mortgage, it is important to know what your goal is. Refinancing your home will not pay off your debt, it will simply restructure it, usually at a lower interest rate and altered loan terms than your current mortgage. If your goal is to reduce the interest expense of your mortgage, than refinancing might be right for you. If you are in need of lower monthly payments, refinancing your mortgage will also allow you to push the loan back several decades. This comes in handy if you are struggling to repay your mortgage, and may allow you to avoid other methods of repayment such as taking out payday loans. Another legitimate goal of refinancing is in the case that you have both a home equity loan and a first mortgage, you may consolidate your debt by combining the two mortgages into a single fixed-rate mortgage, which would level out the payments over your loan’s term.
Making Monthly Mortgage Payments More Affordable
Some people refinance their home simply because they want to make their monthly mortgage payments affordable. Refinancing helps to do this through a lower interest rate and a longer loan term. It is important to know however, that refinancing your mortgage may not minimize your total interest expense.
Get Your Timing Right
It is crucial that you get the circumstances and the timing right on refinancing your mortgage. Usually, it’s a good idea to know before hand that you and your family will be staying in your house for a long time to make refinancing a good idea for your situation. To do this, look at the savings of refinancing compared to the cost, and consider the length of time that your family will own the property in consideration. You should also consider how many months of paying lower interest on your mortgage will make up for the closing costs of refinancing. The national average for closing costs on a typical $200,000 mortgage is $3,754.
Know Where You Stand
Before you consider refinancing your home, take into consideration the standing of your current mortgage. Analyze your interest rate, loan terms, and all other relevant data such as you and your spouse’s credit score, and if your current mortgage has a prepayment fine. Weigh all this information with the benefits of refinancing your home to make sure it’s worth your time and money.
When It’s a Bad Idea to Refinance Your Home
If you do your calculations you may find that refinancing your home isn’t a good idea at this moment after all. It is a general rule that if you aren’t planning on staying in your current home for a very long time, refinancing probably is not a good idea. This is because the number of months that it will take to recover the closing costs may exceed the time that you will be in the house.