There are times when it pays (literally) to refinance a mortgage. Refinancing a mortgage means paying off the existing loan and replacing it with a new one. There are many reasons why homeowners refinance, from obtaining a lower interest rate, to shortening the term of the loan, to switching types of mortgage loan, to tapping into equity. Below are some of the reasons to consider refinancing:
- One of the best reasons to refinance is to lower the interest rate on your existing loan. The rule of thumb is if you can reduce your current interest rate by 2%, then it is a no-brainer.
- If refinancing will shorten the length of your loan from a 30-year mortgage to a 20 or even 15-year mortgage, and you plan to keep the home, this makes sense.
- Those who want more stability in their loans, and who are looking at increasing mortgage payments from an ARM, may want to look into a fixed-rate loan while interest rates are this low.
- If you have high credit card or other debt and have equity built up in the home, refinancing to tap into the equity to pay off those debts, send a child to college, or make improvements to the home, makes sense for some homeowners.
- If the homeowner is able to make higher monthly payments due to a new job or salary increase, switching from a 30-year mortgage to a 15 or 20-year mortgage to pay off the home faster and build equity makes sense.
Before refinancing your current mortgage, you must have a clear understanding of all financial objectives. Refinancing normally costs between 3 and 6% of the loan’s principal and it can take years to recoup that cost with any savings generated by a lower interest rate or shorter-term loan. A refinanced loan can go a long way to improving your financial situation, however if you are not planning on staying in the home or keeping it long term, then refinancing might not make sense. Be sure to talk to your investment manager and do what is right for your particular situation. Be sure to call Sonja at 661-979-9000 or email her at [email protected] to discuss your refinancing options also.