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Deciding when or if to refinance your home depends primarily on your own unique financial situation. There really is no clear-cut rule for when or when not to do it. There are times when it makes economic sense to refinance. In order to ascertain what’s best for you, it’s important that you take stock of your own financial circumstances in relation to your financial objectives and goals.
One major consideration that you must be aware of is the length of time that you anticipate living in the home. Another factor to take into account is the direction that market rates are moving, both currently and in the near to intermediate future. Any decisions that you make concerning refinancing should rest largely upon careful deliberation of these and other issues.
One of the main reasons that people refinance their homes is to consolidate their high-interest credit card debt. Converting this taxable debt to tax-exempt mortgage debt can literally save thousands of dollars over the life of the loan. And mortgage interest rates are generally significantly lower than credit card and installment loan debt, so refinancing to pay off those high interest-rate loans only adds to your savings.
Lowering your monthly payments is another very popular reason for refinancing. For instance, an interest rate drop of only one-half to three-quarters of one percent can lower your monthly payment. However, the cost of obtaining the refinancing may nullify any savings that you could realize. This is when you need to be aware of how long you will continue living in the home. Since most families generally change dwellings every six- to nine years, the length of time you stay in the home after the refinance will determine if you’ll be able to recoup the costs of getting the new loan.
Changing the term of your mortgage can also lower your payment. Even with the same interest rate, going from a 15-year to a 30-year mortgage will significantly lower your monthly payments. However, the total amount that you’ll pay in additional interest over the life of the loan will be dramatically greater. But again, taking into consideration the length of time you’ll live in the house after refinancing, the lower payments may be worth your while.
Since the summer of 2004, the Federal Reserve has raised interest rates several times and most experts foresee that trend to continue. If you have an adjustable-rate mortgage (ARM), your interest rate may eventually adjust to a rate that’s higher than a fixed-rate mortgage. It may therefore be prudent to consider refinancing to a fixed-rate before that happens. Again, you’ll need to take into account the amount of time you’ll remain in the home. If you plan on moving within a few years, for example, it may not be cost-effective to refinance.
You can gain access to the equity in your home by opting for cash-out refinancing. The money can be used for higher education costs, home renovations, or any other financial needs that you may have.
In order to make the best decision for yourself and your family, it’s crucial to be aware of your financial situation as well as your short- and long-term financial goals. To get an idea of the potential financial impact of any refinancing, be sure to use our wide array of Mortgage Calculators. They’ll help to give you a clearer picture of the monetary implications of your decision before you commit to it. After all, the best decisions are based upon the most thorough information.
