Refinancing your mortgage is a big decision. Here are a few considerations that can help you determine your best option. Low mortgage rates typically compel homeowners to refinance, but you may find additional reasons to update your home financing.
Lower Mortgage Rates Mean Lower Payments
Low mortgage rates offer homeowners a great opportunity to reduce their monthly payments. Refinancing to a new mortgage with a lower mortgage rate can be worthwhile, but it's important to consider the costs involved:
Closing costs: You will pay closing costs for a new mortgage that average three to five percent of your new loan amount. Although it may be possible to roll some closing costs into your new loan, this increases your loan balance and the amount of interest you'll pay.
Additional interest paid over a longer loan term: While lower mortgage payments are good news for many families, refinancing to a new 30-year mortgage stretches out your payment term and could reduce potential savings created by refinancing to a lower mortgage rate. Online mortgage calculators can provide estimated amortization schedules for your current mortgage and refinancing terms you're considering. Please keep in mind that mortgage calculators provide estimates; your final refinance costs can vary based on changing mortgage rates and actual versus estimated closing costs.
Refinance Based on Short and Long Term Goals
Your short term goal is reducing your mortgage rate, but refinancing may not be worthwhile if you're planning to move in a short time. Calculating the break-even point for refinancing costs can help you decide whether or not to refinance based on when you plan to sell your home. Use our break-even calculator to estimate your break-even point based on estimated savings and refinancing costs. If you sell your home before your estimated break-even point, you wouldn't recoup all of your closing costs with interest rate savings.
Consider your mortgage repayment term. While it's possible to reduce your mortgage payment by refinancing to a 30 year mortgage, the National Association of Realtors® notes that you can potentially save thousands of dollars in interest with a shorter mortgage term. 15-year mortgages are attractive if you want to be mortgage-free before retiring. A shorter mortgage term requires higher monthly payments, but the trade-off is paying off your mortgage faster and at less cost.
Buried in Bills? Refinancing for Debt Consolidation
Depending on how much home equity you have, you may qualify for cash-out refinancing, which can be used to pay off credit card debt, medical bills, tax debt, or even vehicle loans. Please keep in mind that cash-out refinancing does not reduce your debt; it transfers consumer debt to mortgage debt. The Federal Trade Commission points out that this can be risky if you have little home equity or may run up credit card balances after refinancing; increasing your mortgage debt can lead to default or foreclosure. Debt consolidation with cash-out refinancing can simplify bill paying and eliminate fees and higher interest rates charged by creditors for late payments. Before refinancing for debt consolidation, we suggest discussing your needs and goals with a professional financial advisor.
Contact our network of mortgage lenders for free refinance quotes and to learn more about available refinancing options.