Before you rush to refinance your home loan, take time to make sure the decision is right for you. When you refinance, you’re restructuring your mortgage debt, usually at a lower interest rate and different term than your current loan.
In recent years as interest rates dipped to all-time lows, many homeowners locked in lower rates by refinancing. But a lower rate is just one reason to refinance. Your goals play a big role in the decision, so be sure to use refinance tools and checklists to clarify what you hope to accomplish.
What are your goals?
- Do you want a lower interest rate?
- Do you want to reduce your monthly payment?
- Are you planning to consolidate your debts? (home equity loan, high-interest credit cards)
- Is it time to stop paying private mortgage insurance?
- Do you want a 15-year mortgage? Are you ready for a 10-year mortgage?
Perhaps you want a fixed-rate mortgage or an adjustable-rate mortgage (ARM)?
Know the Risks
Refinancing your home does come with risk. Not everyone looking to lower their interest payment will find success with refinancing. Discover some scenarios where you may want to avoid refinancing:
- If your breakeven point is too long.
- If the long-term savings aren't significant.
- If you can't afford the closing costs and are considering wrapping them into your monthly payment.
- If moving to an adjustable-rate mortgage puts you at risk when your payment increases.
How much will I really save?
How long will it take to break even on a mortgage refinance? That depends on a multitude of factors including your current interest rate, the new potential rate, closing costs and how long you plan to stay in your home. Use this
Other refinance considerations
- How long do you intend to remain in your home?
- Is your credit rating stable, or has it improved since you originally bought your home?
- Have you incurred significant debt that may have an impact on your ability to secure the best interest rate possible?
Because circumstances are unique, it may be smart for you to wait until auto loans are paid or to consolidate high-interest credit card debt into your refinanced mortgage. It all depends on your full financial picture. Some homeowners owe less on their mortgage than their home is worth. They may choose to refinance to use the equity as cash to achieve other financial goals. Whatever your circumstance, take time to learn how a home loan refinance may impact your cash flow, financial goals and overall financial journey.