Most homeowners refinance their home loans to lower their mortgage rates, but other factors can impact your decision to refinance or not. The following considerations can help you answer the question, "Should I refinance my mortgage?"
Considerations: Should You Refinance Your Home?
Your reason(s) for refinancing
Depending on your needs, refinancing your mortgage may or may not be your best option. For example, refinancing to pay for college costs may not be the best plan if unsecured government-sponsored student loans are available at comparable or lower rates.
Closing costs take a bite out of potential savings
Remember to include closing costs when calculating potential advantages and savings associated with refinancing.
Break even on refinancing
It can take several years to realize savings from a refinance. Some lenders will simply tell you to divide the closing costs by the difference in the new and old mortgage payments. However, some (perhaps MOST) of that difference is not savings; it's simply the result of stretching out the repayment of your remaining balance over a new term. In fact, refinancing could cause you to pay more over the life of the loan. The best way to find your true breakeven is by using LendingTree's Refinance Breakeven calculator, which calculates your breakeven four different ways and tells you what your true savings are. In addition, it tells you what your savings would be if you refinance to a shorter term with a higher payment.
Cash-out refinance can provide funds for debt consolidation. If you're paying double-digit finance charges, late fees and membership fees, or you're stressed out over debt management issues, a cash-out refinance can help by consolidating several debts into a refinance. However, while mortgage rates are lower than rates for credit cards and consumer loans, the longer mortgage term can reduce or eliminate potential savings over time. You'll also need to deduct closing costs from any potential savings resulting from debt consolidation through refinancing your mortgage. The most important factor in deciding whether or not to refinance for debt consolidation is understanding how you got into debt in the first place. Otherwise, you could end up with more mortgage debt and more bills. A home equity loan or line of credit can also provide funds for consolidating debt without the higher cost of refinancing. It's important to keep in mind that debt consolidation does not pay off your debt; it only moves debt from one or more accounts to another.
Refinance to shorter loan term
If you're refinancing to lower your mortgage rate and can afford higher mortgage payments, consider refinancing to a shorter mortgage term. This can potentially save thousands of dollars in interest paid over the life of your refinance loan, and you'll pay off your mortgage faster.
Home renovation and remodeling
If you want to remodel or renovate your home, refinancing to a HUD 203(k) mortgage can help by rolling construction costs into a new mortgage that's based on your home's value after improvements are completed. Less extensive projects can be funded with a cash-out refinance or a home equity line of credit, which allows you to pay for expenses as needed.
Refinancing and Home Equity
Your home equity is the difference between your home's current appraised value and the amounts of any mortgages owed against it. A cash-out refinance increases your mortgage balance and reduces your home equity. The Federal Trade Commission advises homeowners that this can be risky; if you later have a financial hardship, you'll have higher mortgage payments and less home equity. Foreclosure could become a serious risk. Housing market conditions change; if you refinance with cash out and your home value later falls, you could risk owing more on your home than it's worth.
Considering these factors can help answer the question, "Should I refinance?" The LendingTree network of mortgage lenders can provide mortgage quotes and answer questions about refinancing options.