Buying a home is usually a long-term commitment. Unless you pay in full with cash to get the keys, signing on the dotted line means taking on a mortgage and agreeing to monthly payments for years into the future. Since a lot can change in that much time, you may be in a very different financial situation now than you were when you first negotiated the terms of your mortgage. If you are looking for a way to lower your payments or get your loan paid off faster, you may want to consider refinancing. But before you take the plunge, it’s a good idea to weigh the costs and benefits for your situation. Here are some reasons refinancing might be the right move:
Rates Have Dropped
Since the popping of the housing bubble, interest rates overall have dropped, so there is a good chance you can get a better rate by refinancing. Getting a lower interest rate can mean your monthly mortgage payments will be lower. If you still have plenty of months to go to pay off your mortgage, you may save a significant amount of money in the long run.
Your Credit & Finances Have Improved
Interest rates may have changed, but have you? If you have gotten a significant raise or gotten rid of serious debt since you originally got your mortgage, your credit score has probably improved and you could qualify for a better interest rate (if you want to know where you stand, you can get two of your credit scores for free on Credit.com). Better yet, if you can afford larger payments each month, you could refinance to a shorter term (like switching from a 30-year to a 15-year mortgage) and be finished with your mortgage sooner.
You Want to Change the Terms
Beyond the length and interest rate of your loan, you may want to switch the terms of your loan. You can switch from an adjustable-rate mortgage to a fixed rate if you are looking for more stability.
You Need to Tap Equity
If you need to free up cash, you can use some of the equity you have built in your home and refinance your mortgage to a longer term. This means it will take longer to pay off than you originally planned and you will likely pay more in interest, but it can be helpful if the other expenses in your budget have gone up, your income has gone down or you want to explore some new investment opportunities.
You Want to Consolidate Debt
If you are currently paying back a mortgage and a home equity loan, you can combine the two into one with a refinance. This can make managing your payments easier.
The Break-Even Date Makes Sense
The ultimate test to deciding if you should refinance comes down to how much it will cost you compared to how much you can save. You need to figure out when the monthly savings of your new mortgage become greater than the upfront costs of refinancing. This tells you how long it will take for the refinance to save you money. If it falls within the timeframe you plan on staying in your house, you may want to refinance.
Ultimately, refinancing is a very personal decision that will come down to your specific financial situation.
More on Mortgages & Refinancing:
- How to Find & Choose a Mortgage Lender
- How to Refinance Your Home Loan With Bad Credit
- How to Get a Loan Fully Approved