Should I Refinance or Not

Buying a home is one of the biggest and most important financial decisions you will make in your life and it involves a mortgage which is a wonderful tool to help you reach your future home goals.

Since many people go through the question should I refinance? Let us understand if it is the right choice.

Here’s a guide with the pros and cons, the requirements, eligibility, etc to help you decide for yourself.

Why should I refinance my mortgage?

By refinancing you can change the terms of your mortgage and secure a lower monthly payment, you can also switch your loan terms, consolidate debt, or even take some cash from your home’s equity to put toward your pending bills or get a renovation done.

Let’s dive deeper into the question ‘should I refinance?’ and find the reasons you may want to refinance.

1. When you want to change your loan term

There are various reasons why you as a homeowner might want to change your loan term. You may be switching to a longer or shorter term.

Longer mortgage term

If you having trouble making your monthly mortgage payments, or are not satisfied with your current payment amount then a refinance can allow you to lower your monthly payments by lengthening the term of your mortgage.

For instance, you can make a lower payment each month just by lengthening your existing 15-year mortgage to a 30-year refinance loan term.

You may get a higher interest rate when you lengthen your mortgage term, because inflation is taken into account by the lender, and the possibility of you paying more in interest over a period of time because of a longer mortgage term.

If your current payment schedule is not working with your household income then with a refinance you can free up more cash to invest or, build an emergency fund or spend it on other necessities.

Shorter mortgage term

Similarly, you can also refinance your mortgage from a longer-term to a shorter term.

You will enjoy lower interest rates and own your home sooner when you switch from a longer-term mortgage to a shorter term.

Sometimes switching to a shorter-term means that your monthly payments have increased, so be to have enough stable income to cover your new payments before you sign on for a shorter term.

2. You need cash to pay off debts

You might have equity in your home because you’ve made payments on your mortgage.

Equity can be gained by either paying off your loan principal or when the value of your home rises.

Just by making your regularly scheduled monthly payments, you would have built a bit of equity in your investment when your loan is more than 5 years old.

Cash-out refinance for debt

By replacing your current loan with a higher-value loan and by taking out a portion of the equity you have, a cash-out refinance helps you to tap into the equity of your home.

For instance, if you have a mortgage of $200,000 and equity worth $50,000 it means that you still owe $150,000 on the loan.

You can accept a new loan for $170,000, and in a few days after closing your lender would give you the cash difference of $20,000.

Because you need money to pay off other debts you might seek a cash-out refinance.

If your debts are spread over multiple accounts, then a cash-out refinance can be used to consolidate the debts to a lower interest rate, pay off each account, and transition to one monthly payment.

With consolidation, you can keep a better record of what you owe and avoid instances of missed payments, late fees, and overdraft charges.

3. When you want to improve your home or renovate it

For repair or for replacing some fixtures, you might need to invest in your home.

It is better to use the equity in your home rather than taking out a personal loan or putting charges on a credit card because they would work out to be more expensive and cash-out refinances would have comparatively lower interest rates.

Cash-out refinance for renovations

The average 30-year mortgage rate is currently is less than 3.5% while the average credit card rate is more than 12%.

So by choosing a variable rate credit card or a store credit card, you’ll be paying more in interest.

But if you have enough equity in your home for a cash-out refinance, you can complete your renovations or repairs without huge interest charges.

Remember even though it is a refinance it is still a loan so do thoughtful spending.

So before you close on your refinance get estimates from contractors or repair professionals.

So that you don’t take out too much or too little money and have another bill sitting after the job is finished.

4. You want to have a better retirement saving

The principle of compounding interest is one of the most powerful tools when it comes to saving for retirement.

The sooner you start to invest and save, the more years you have to accumulate interest on your investments before retiring.

Cash-out refinance for investing

If you have not maxed out your annual retirement contribution limits and having equity in your home then you can make more money by taking a cash-out refinance and investing the difference.

A cash-out refinance can also be used to invest in your property.

Just by adding a new bathroom, or sprucing up your paint, or install a privacy fence, these upgrades will bring more money when you sell your house by increasing your home’s value and curb appeal, which can help you secure a higher closing price.

5. When you are converting from ARM to a fixed-rate mortgage

Some homeowners may opt to refinance their ARM into a fixed-rate mortgage, so as to eliminate the fluctuation in interest rate.

Likewise, it’s also possible to refinance a fixed-rate mortgage into an ARM.

Though it is riskier when the interest rates are falling it could be a better option, or if you plan to sell your home before the initial period of fixed interest ends.

Still, stuck with the decision of — should I refinance?

Evaluate your finances

Assess your long — and short-term financial goals by looking at your current financial situation.

Understand what is refinancing

Know about mortgage refinance and its workings to be sure that there are no surprises along the way.

By taking into account the expenses like closing costs which you will incur while refinancing so you can decide and ask yourself the question should I refinance my Home Loan?

Use a mortgage refinance calculator

When you use a refinance calculator you will get a basic idea of how a refinance can affect your monthly mortgage payment.

When you put in some basic information like your goals, current mortgage, your location, and your credit score, and you’ll instantly be able to calculate what your refinance payment could look like.

Consider Timing

When it comes to refinancing some time frames are better than others, so understand when it makes the most sense.

When should I refinance?

Make sure to consider home values and interest rates in your area when you plan to refinance, and how long will it take to refinance.

When Your credit score is good and When the interest rates are low

Conclusion

A refinance could help you move closer to your financial and personal goals.

You can opt for refinancing when you want to lower your monthly payments or, adjust your loan term or access cash for home improvements, or to pay off your existing debts.

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