Refinancing your mortgage means paying off your existing loan and replacing it with a new one. There are many reasons why homeowners refinance: to obtain a lower interest rate, to convert from an adjustable-rate mortgages to a fixed-rate mortgage and the opportunity to tap into a home’s equity in order to finance another purchase, are just some examples. Refinancing can cost between 3% and 6% of the loan’s principal and sometimes requires another appraisal, title search or application fees. It’s important for the homeowner to determine whether their reason for refinancing offers enough benefit.
One of the benefits to refinance is to lower the interest rate on your existing loan. Historically, it was worth the costs associated to refinance if you could reduce your interest rate by at least 2%. Today, many industry experts say 1% savings is enough of an incentive to consider refinancing. Reducing your interest rate not only helps you save money, it also increases the rate at which you build equity in your home and can decrease your monthly payment.
Adjustable-rate mortgages can start out offering lower rates than a fixed-rate mortgage, however, periodic adjustments can result in rate increases that are overall higher. When this occurs, switching to a fixed-rate mortgage can result in a lower interest rate and alleviate the concern over possible interest rate hikes in the future. On the other hand, converting from a fixed-rate mortgage to an Adjustable-rate can also be a good financial move, particularly in a falling interest rate market. Converting to an adjustable-rate may be a good idea for homeowners who don’t plan to stay in their home for a long period of time. If interest rates fall, homeowners can reduce their interest rate and monthly payment and eliminate the need to worry about interest rates rising in the future.
Homeowners often access the equity in their homes to cover other expenses, such as the costs of home remodeling or a vacation. Remodeling can add value to your home and it’s worth noting that often the interest rate on the existing mortgage loan is likely less than another loan. Also, the interest on a mortgages is tax deductible, which is another positive. While these all make good arguments, increasing the length of time that you owe on your mortgage is rarely a smart financial decision and should not be taken lightly.
Many homeowners also refinance in order to consolidate their debt. Initially, replacing high-interest debt with a low-interest mortgage is a good idea, unfortunately refinancing does not automatically solve long-term debt solutions. Seeking sound financial advice and counselling is often a good idea to ensure large debt does not happen in the future.
Refinancing your mortgage can be a great financial decision if it reduces your overall payment, shortens the term of your loan or helps you build equity more quickly. It is always best to seek the advice of a professional, such as a financial or mortgage adviser to receive sound advice in order to make an educated decision.