Refinancing Your Home Loan: Is It Worth It?

With interest rates currently at historic lows, many American’s are considering refinancing their home loan. If you haven’t considered refinancing, keep reading to discover the reason it might be a great financial decision.


Even if your current loan payments are affordable, there are a variety of benefits to refinancing. Whether you’re just trying to reduce monthly mortgage payments or you need cash to pay for essential expenses, you want to make sure that you examine your options, talk with a professional and always take the time to make sure you’re doing what makes sense for your personal financial situation.


What is refinancing a home?


Refinancing a mortgage involves taking out a new loan, typically with better terms, to pay off an existing mortgage.


Reasons to Refinance


Lower Your Interest Rates


This is one of the most common reasons people refinance. Have rates dropped since your first mortgage? Has your credit score improved significantly? Lower interest rates could mean saving money over the life of your loan, especially if you want to stay in your home for many years to come.


Shorten the Term of Your Mortgage


When interest rates drop, homeowners might have the opportunity to refinance an existing loan for another loan that has a significantly shorter term, with similar monthly payments.


For example, for a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if your interest rate is already 5.5% for 30 years with monthly payment of $568, getting a 3.5% mortgage for 15 years would raise your payment to $715, which may be too significant an increase for many borrowers*.


To Convert to an Adjustable-Rate Mortgage or a Fixed-Rate Mortgage


Some adjustable-rate mortgages start out by offering lower rates than fixed-rate mortgages, but periodic adjustments can result in increases that are higher than the rate available through a fixed-rate mortgage. So, you can refinance to a fixed-rate mortgage with a lower interest rate, and, eliminate concern over spikes in interest rates in the future.


Converting from a fixed-rate mortgage to an ARM can be a good financial strategy if interest rates are falling and you are a borrower who does not plan to stay in their home for the long term. These homeowners can reduce their loans interest rate and monthly payment without having to worry about rates increasing 30 years into the future.


To Tap Into Home Equity or to Consolidate Debt


Some homeowners will access the equity in their homes to cover major expenses. One example of this is a home remodel, which will likely be justified through ‘adding value to the home’. Another justification for a refinance could be that the interest on mortgages in tax-deductible*. It’s important to stay weary of these justifications because increasing the number of years that you owe on your mortgage might not be a smart financial decision. However, if funds are needed and it won’t cost you more money throughout the loan term, it might be a fantastic option for your situation.


Many borrowers refinance to consolidate their debt. Getting a lower interest rate may make you feel like you have more financial freedom, but don’t take this step if you cannot resist the temptation of using the extra money to get yourself into even more debt through new credit cards, cars, or other purchases.


Questions to Ask Yourself:


How long do I plan to live in this home?


How much money will I save by refinancing?

If you’re thinking about refinancing, now is certainly a great time to do so, with interest rates at all-time lows. Get started by talking with a licensed loan officer today.




Sources:

https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/


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