Should I Refinance My Mortgage?
As soon as you purchase your home, they start to arrive in your mailbox. Offers to refinance are incredibly familiar fare for homeowners. Even if you’re perfectly content with your current home loan, it’s inevitable. Someday, you’ll start to wonder. Should I refinance my mortgage? Exploring the reasons why people choose to refinance can help you decide if there’s a motive that might apply to your situation. If so, understanding the financial impacts of refinancing can help you weigh the pros and cons so that you can make the right move.
The Reasons for Refinancing
There are a variety of reasons why homeowners might decide to refinance. Having a clear goal in mind can not only help you feel confident about your decision to refinance but also guide your selection of a refinance product. NerdWallet provides a handy list of popular reasons for refinancing:
- Getting a lower interest rate. Securing a lower interest rate can help you get a lower monthly mortgage payment and reduce the overall cost of your loan.
- Changing your loan’s term. The loan’s term is its length. A shorter term will generally mean higher payments, but you’ll pay less interest over the life of the loan, which means it will ultimately cost you less. A longer term will have lower monthly payments, but you’ll pay more interest in total.
- Getting a lower monthly payment. If a tight budget is making a lower monthly payment a priority, then a lower interest rate is one way to make it happen. Opting for a longer loan term is another option.
- Accessing your equity. A cash-out refinance is a common strategy for homeowners who want to tap their home equity. With a little luck, you may also get a lower interest rate.
- Switching loan types. Borrowers who want to switch between adjustable-rate loans and fixed-rate loans often use refinancing to make it happen.
- Getting rid of mortgage insurance. With private mortgage insurance, you can jump through some hoops and try to get your PMI canceled early. Alternately, you can simply refinance into a loan where PMI won’t be required. If you have an FHA loan, the only way to get rid of your mortgage insurance is to refinance into another type of loan.
The Financial Side of Refinancing
There’s a cost to refinancing. After all, you’re taking out a new home loan, which means that you’ll be paying closing costs again. However, there’s also the potential for financial benefit. How can you weigh the pros and cons? You could break out pencil and paper and run the numbers by hand, but there’s a much easier way. PrimeLending provides an online Refinance Calculator. Start by plugging in your loan amount, interest rate, and loan start date. Then, fill in information about your desired loan to discover how your new payment will compare to your current payment. You’ll also see how long it will take to recover your closing costs. The calculator makes it easy to play with the numbers and try out different scenarios, so you can see when refinancing is worthwhile. You’ll also be able to see when it isn’t. With the data at your fingertips, you’re able to make an informed decision.
How Much Does It Cost to Refinance?
The cost of refinancing varies. According to MarketWatch, the average cost is around $5,000. Is it worth it? That depends on your situation. For example, if you’ve been in your home loan for quite a while, and your principal balance is very low, then you may not see much benefit from refinancing. Refinancing tends to bring greater benefits in the earlier years of a loan.