When Does It Make Sense To Refinance? Sometimes it’s to take advantage of lower interest rates, but there are many other reasons to refinance. Are any of them right for you? Find out by seeing if you can answer “yes” to one or more of the following questions.
Is your monthly payment straining your budget?
You may want to consider refinancing to lower your monthly payment.
Even if rates are the same as when you obtained your current mortgage, you may want to refinance to extend the term of your loan if you’re having difficulty meeting your monthly payments.
Has your credit rating improved?
When you applied for your mortgage, perhaps you had little credit history or maybe even a blemish or two on your borrowing record. Your credit score was a big factor when your lender determined the interest rate on your mortgage. If you had a low or mediocre score that has since improved, you may now be eligible for a better rate if you refinance.
Have you recently begun to earn a higher income?
Refinancing isn’t always about lowering your monthly payment. Maybe you’ve received a salary increase at work, or your spouse has recently returned to the workforce after staying home to raise a family. You may want to put that extra income towards your mortgage. Converting to a 15- instead of a 30-year amortization, for example, will pay it off much faster and save you tens of thousands of dollars in interest payments.
Do you need to consolidate debt?
If you have built up considerable equity in your home, but you’re mired in other debt, consider an Equity Take Out (ETO). Debt consolidation involves getting a new mortgage for a larger amount than you currently owe. For example, if your home is worth $285,000 and your outstanding principal is currently at $185,000, you have $100,000 in equity. By refinancing to a new mortgage with a principal of $215,000, you can free up $30,000 to pay down high-interest credit card or other debt. You’ll save money if your new mortgage has a lower rate than the other loans, and you’ll have the added convenience of only having to make a single monthly payment.
Do you need money for a major expense?
ETO’s aren’t just for consolidating debt. If you have available equity in your home, it may enable you to undertake some major home improvements, or to free up money for your children’s education. If you do plan on pulling money out, it’s important to be realistic about your future goals. Remember that taking cash out will increase the principal you owe on your home. This may impact you when you go to sell your home.
Remember, refinancing doesn’t come without a price: closing costs will eat into your savings at first, so the longer you plan to stay in your home, the more you’ll benefit.