Your home mortgage is an important investment in your future, and a mortgage refinance can be a smart move to help you manage your investments when used under the right circumstances. Here are some things to consider about refinancing your mortgage.
Simply put, when you refinance your mortgage, you are taking out a new loan to pay off your original mortgage, so the first question to ask yourself may be: Is there a better product available to you than what you started with?
Refinancing allows you to borrow against the equity you have built up in your home and take out cash you can use to pay off other debt, make home improvements, or invest in your retirement. For example, let’s say you have $70,000 of equity in your home, but still owe $175,000 on your mortgage. You may take out a new mortgage for $200,000 that is used to pay off the first mortgage, and then pays you $25,000 in cash. If you have made regular payments on your initial mortgage for at least five years, you probably have enough equity built up to take a cash-out mortgage.
Another reason to refinance is to reduce your monthly payment to give you more flexibility in your monthly budget. When you refinance, you are basically starting over on your 30-year commitment, but, if you are not taking cash out, your new mortgage amount will be lower, so your payments decrease.
If you originally took out a 15-year mortgage, changing to a 30-year term will lower your monthly payment considerably.
You may also choose the opposite and switch from a 30-year loan to a 15-year term. Your monthly payments will likely increase, but you will pay your loan off earlier and pay less interest.
Another reason people refinance is to change from an adjustable-rate mortgage (ARM) to a fixed-rate. This eliminates fluctuations in your monthly mortgage payment and may help you take advantage of favorable rates.
Before you decide to refinance, do some homework. You should perform an audit of your monthly budget, assess your short and long-term financial goals, check your credit score, watch interest rate fluctuations, and consider the costs involved in refinancing as there will be closing costs on your new loan.