While many refinance their home loans for various reasons such as lower interest rates, shorter terms, a fixed vs adjustable rate, there are good and not-so-good times to refinance. Because refinancing can cost 3-6% of the loan's principal in appraisals, title searches, and application fees, it's important to determine whether doing so will truly be a benefit and if now is the right time.
Refinancing to obtain a lower interest rate is one of the best reasons to refinance your mortgage. Even a 1% savings is considerable enough to justify a refinance. This helps you build equity in your home (see Borrowing Against Your Home's Equity) and saves you money.
Additionally, when interest rates fall, it may be an ideal time to refinance your loan because you may be able to shorten the term of your loan without considerably affecting your monthly payments. A large enough drop in rates could cut your term in half.
Although adjustable rate mortgages offer a lower interest rate in the beginning, they tend to quickly increase to a higher rate than what may be offered by a fixed rate mortgage. When this increase happens, it may be a good time to start looking into your refinancing options.
On the other hand, if you're on a fixed rate mortgage and rates drop, it could be financially sound to refinance with an adjustable rate mortgage as this could save you a lot of money in the short term. However, it is recommended that you only make this switch if you plan to be in your home for just a few years. If you know you've landed in the place you plan to reside for years to come, this may not be the right move for you.
As we've mentioned in previous blogs, tapping into your home's equity can help with funding your child's college tuition or an expensive remodel. However, refinancing for equity purposes can be a dangerous path towards never-ending debt. Keep in mind that, if refinancing your mortgage increases your term, this is rarely a smart decision.
Consolidating debt can be another motivation in refinancing. However, for those that have accumulated a lot of high-interest debt on credit cards, it is likely the same will happen once a mortgage refinance gives them the available credit to do so.
Bottom line, if refinancing will lower your interest rate or shorten your loan term, it could be a financially sound decision. Before you make a decision, crunch the numbers to ensure you'll actually be saving money in the long run. Take caution if the purpose of your refinance is to tap into your equity or consolidate debt - it could be a slippery slope if not managed carefully.
Author:Kurt Galitski DRE 01348644 Phone: 714-957-6677 Dated: January 18th 2017 Views: 83 About Kurt: After 15 years of founding and running a successful boutique real estate office in Costa Mesa as a l...
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