When Should I Refinance My Mortgage?

By now, you have probably heard about the historically low mortgage interest rates that are being offered. There is a lot of buzz about refinancing your mortgage now to cash in on these low rates. People are asking, “When should I refinance my mortgage?” The answer is, it depends.

First, you have to know what the difference is between your current mortgage interest rate and the new one. Is it significant? Mortgage rates have been pretty low for several years now, and if you have one that is only slightly higher than current rates, it may not actually make sense to refinance. Why not? Well, it costs money to refinance, so you have to take that cost into consideration. You will probably be required to pay for an inspection so the bank can determine how much equity you have in your home (how much more it is worth if you were to sell right now compared to what you currently owe). Plus, there will be a fee. That fee can vary greatly, and can add up to thousands of dollars. Even though it gets financed into the mortgage, you will still be paying it, and the interest on it. Plus, depending on what terms you choose, you could be extending your mortgage term,  thus paying more interest over time. If you are choosing a 30-year term, you will be starting over.

Before you make the decision about refinancing, use an online calculator to see how much doing so will cost you. Think about the reason for your refinance. Is it to consolidate all your debt, by taking a cash out and paying off all your other debt besides your mortgage? If so, would doing so lower the amount of money you are forking out each month? Are you just trying to get a shorter term on your mortgage, by changing from a 30 year to a 15 or even 10 year term? Your payments could stay close to what you pay now if the interest rate change is significant, while the amount of time decreases. You would save a lot of money in interest if this is the case. Are you refinancing because you want money to improve the house? That could pay for itself when you sell, but you would have to carefully consider how much you would be paying for it over the loan term vs if you just saved up or didn’t do it at all. Will you really get more for your house because of these improvements? If the improvements are necessary, like a new roof or plumbing, then it could make sense if you don’t have access to that kind of cash any other way, and now would be the time to do it with rates this low. The best case scenario would be to consolidate your debt, refinance to a shorter mortgage term, and have a lower monthly payment, with a low initial fee. If you find a deal like that, it might be the perfect time to refinance.

Take Aways

Refinancing your mortgage is a big decision. It can affect how much you pay each month, and how much you pay over time for your house. It can make sense, if your other debt payments can be rolled into it, thus creating one monthly payment. Using a calculator to determine how much that debt will cost you over the term of the loan will help you determine if it is a good idea, or not. Always do your research beforehand.

Have you refinanced your mortgage? What made you choose to do so? Are you happy you did it? Still have a question? Please comment below.

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