When and When Not to Refinance Your Home Mortgage

Refinancing your home mortgage is a move that could save you a significant amount of money, but only under certain conditions.

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Main considerations

Since refinancing a mortgage comes with its own costs, trying to lower the interest rate in this way could end up actually being more expensive than continuing to repay your current loan.

Sifting through the many refinancing offers can also be overwhelming and the information may sometimes be misleading. With that in mind, how do you tell when and when not to refinance your home mortgage?

What Is Refinancing?

When you choose to refinance your mortgage, it means that you pay off your original loan and then replace it with a new one at more favorable terms. Although the interest rate and terms of the new mortgage are different, the property that secures the loan remains the same.

Since you already own your home, you will find that getting a new loan to refinance is often easier than it was to get approved for the original mortgage. In addition, if you have had the property for a long time, you probably have substantial equity, which makes it easier to refinance.

Review the Refinancing Costs

The refinancing cost is one of the factors that will determine when and when not to refinance your home mortgage, but there are things you need to understand before you make your decision. You should know that refinancing a mortgage comes with almost as many costs as your initial loan. There are several things you will need to pay, such as closing costs, attorney’s fees, transfer fees, appraisal costs, taxes and title insurance fees.

What this means is that refinancing is certainly not free. While there are many lenders who will call their offers “no cost” mortgages, there is actually no such thing. What you can get, however, is a mortgage without any out-of-pocket payments where the costs are simply added to the total loan balance and incur interest, or you may pay a higher overall rate that covers them.

When you are looking to refinance, determining whether the savings from a lower interest offset the costs of the new loan will help you decide if you should refinance.

When to Refinance

Refinancing has become popular due to the advantages it offers during times when interest rates are low. If you believe that a new mortgage will offer you the benefits below, when compared to your current home loan, it may be a good idea to refinance:

  • Lower payments: The foremost argument in favor of refinancing is that it opens up the prospect of lower monthly payments when interest rates drop. You may find that, if there is a large and continuous trend of falling rates, you may even benefit from refinancing more than once.
  • Quicker payoffs: If the mortgage interest rates drop and you are willing to repay the same amount of money each month, you can drastically reduce the amount of time you will take to pay off your mortgage. Depending on how low the rates go, you may even be able to reduce both the repayment term and your monthly repayment amount.
  • Fixed rates: Your new mortgage may give you a way to move from an unpredictable adjustable rate mortgage (ARM) to one on a fixed rate, at better terms. By refinancing when rates are low, you can lock in a favorable rate that will be to your benefit if rates later climb.
  • Cash out: If you have managed to build up equity in your house, you may use a refinanced mortgage to cash out on that equity. This can be a good idea if you need money for other important purposes in your life, such as to pay off credit card debt, fund a new business venture or pay for college tuition.

When Not to Refinance

Although refinancing a home mortgage is often a good idea, it may not always be the case. If you find that refinancing your home loan results in any of the following scenarios, it may be wiser to stick with your original loan:

  • Expenses: Refinancing your home mortgage will come at a cost. This is because lenders, appraisers, lawyers, title companies and various other professionals charge fees for their services. If you are refinancing a small loan, the fees may take up a significant percentage of your overall loan.
  • Longer payoff period: If you are 10 years into the term of a typical 30-year mortgage and then decide to refinance by taking out a new, cheaper 30-year loan, you will see a reduction in your monthly repayment. On the flip side, you will have added 10 more years of repayments to your mortgage and may end up actually paying more in total.
  • Credit traps: If you decide to refinance so you may cash out the equity in your home and repay credit card debt, for instance, you need to be ready to change your spending habits. You can easily find yourself racking up substantial new debt on your credit cards, leaving you in worse shape financially than before you refinanced.
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