Refinancing your home means paying off your existing mortgage and starting fresh with a new home loan. On the one hand, it can be a fantastic way to achieve your goals. On the other hand, refinancing requires an investment of time and resources. Although many lenders will let you roll the cost into your new mortgage, refinancing isn’t free. How do you know if refinancing is the right move? When should you refinance your home?
When Should You Refinance Your Home?
When you’re trying to decide if you should refinance your home, it’s helpful to consider your goals. Could refinancing help you achieve them? Having a clear idea of what you’re hoping to achieve makes it easier to weigh the pros and cons and make a smart decision. When should you refinance your home?
You’re Lowering Your Interest Rate.
Interest rates matter, and Forbes did the math to prove it. A borrower who took out a 30-year fixed-rate loan for $240,000 with an interest rate of 4.94 percent will have a monthly mortgage payment of $1,280 and pay more than $460,600 in interest over the life of their loan. In contrast, a borrower who took out an identical loan with an interest rate of 3.81 percent will have a monthly payment of $1,120 and pay just over $403,000 in total interest. That 1.13 percent difference in interest rate might seem small, but it can have a huge impact on both the short-term and long-term costs of borrowing. If refinancing will substantially lower your interest rate, it might be time to take the plunge.
You’re Changing the Length of Your Loan Term.
When you refinance into a new loan, you can opt for a new mortgage that will be paid off sooner than your existing loan or choose one that will extend beyond that point. It’s a choice between savings and flexibility. As MortgageCalculator.org notes, shortening your loan term means that your monthly payment may not go down much, but you’ll ultimately save money because you’ll pay the loan off quicker and pay less in interest. However, opting for a loan with a longer term normally gets you a lower monthly payment. While you’ll pay more interest over the life of the loan, you’ll enjoy greater financial freedom.
You’re Securing More Favorable Terms.
Are you paying mortgage insurance despite the fact that you now have more than 20 percent equity in your home? Is the inherent uncertainty of an adjustable-rate mortgage a stressor that you just don’t want to deal with anymore? It might be time to refinance. As Dave Ramsey reports, refinancing to a fixed-rate loan is a great way for homeowners to shield themselves from fluctuating interest rates and secure better loan terms.
You’re Accessing Your Home Equity.
Your home equity is the value of your financial interest in your home. To calculate it, subtract the amount owed on your mortgage and any liens against the property from its market value. Equity is an asset, but it takes a little work to access it. A cash-out refinance loan is one way to turn some or all of your equity into cash. As Investopedia indicates, many homeowners choose to turn their equity into cash to do things like finance home renovations, pay for education, consolidate debts, or deal with a financial emergency. While mortgages do offer lower interest rates than other sources of credit and come with certain tax advantages, borrowers who choose to access their home equity should weigh the pros and cons carefully. Financing projects that improve your earning power or your property’s value can pay off, but cashing in equity to pay for things that you cannot comfortably afford can leave you in a precarious financial situation.
When should you refinance your home? If you’re pondering that question or another mortgage-related matter, reach out to the loan experts at PrimeLending of Denver, Colorado. We understand that every customer’s story is unique. That’s why we listen carefully to your housing goals and provide friendly, personalized service as we work with you to find the right loan product for your situation. Whether you’re a first-time homebuyer, a real estate veteran, or a homeowner interested in refinancing, we would be happy to put our expertise to work for you. Contact us today to learn more.