Reducing household spending isn’t the only way to save money on homeownership. You may also be able to significantly cut monthly costs by refinancing your home loan, especially when interest rates are low. A “refi” can offer other advantages, too. But there are also potential downsides. So how do you know if it’s right for you?
Four Reasons to Refinance
To change from an adjustable rate mortgage (ARM) to a fixed rate. With an ARM, your interest rate and monthly payment may increase or decrease as rates change. A fixed rate gives you a constant rate and payment for the life of your loan, which can offer some added peace of mind. (If your payment includes insurance and taxes, those amounts may still change.)
To lower your monthly payments. If you refinance into a lower interest rate, you can reduce your monthly payments. You can use those extra funds for other needs or even continue putting them on your home loan and pay it off early. You’ll also reduce the amount of interest you pay over the life of the loan. You may be able to get a better rate not only due to current market conditions, but also if your credit score has improved.
To consolidate higher-interest debts. You may be able to roll these balances into your refinanced home loan. You could lower the interest you’re paying on the debt and simplify your life by having just one monthly payment to make. Plus, the interest you pay on a home loan is sometimes tax deductible, unlike credit card interest. (Be sure to consult a tax professional for detail).
To change the term of your loan. Extending your loan term is another way to reduce monthly payments, although you’ll likely pay more in interest over the long run. On the other hand, you can also refinance into a shorter-term loan, which will reduce the total interest you pay. However, it may increase your monthly payment.
Three Factors to Consider First
When you refinance, you pay off your current home loan and start a new one. That means:
- You’ll have to go through an approval process similar to when you first purchased your home and requalify for the new loan.
- You’ll pay closing costs, which can be 3 to 6 percent of your outstanding principal. You may be able to roll those costs into your new loan, or they may be waived in exchange for a higher interest rate.
- You should check your current loan terms for a prepayment penalty. If there is one, make sure you factor it into your break-even calculations.
About that break-even calculation … Essentially, it compares financial details of your current loan versus the new one to see how long it will take you to recoup the costs of refinancing. Try out our break-even calculator.
How long you’ve been in your home and how long you plan to stay matter, too. If you plan to move before you hit the break-even point, a refinance might not make financial sense. And if you’ve been paying your mortgage for a fairly long time (say, 15 to 20 years), your payments may now be going to principal more than interest. But if you refi, you’ll revert to having most of the payment go toward interest. Learn more with our payment/amortization calculator.
Look Before You Leap
Refinancing your home loan isn’t a decision to take lightly. So if you have questions or want to discuss your unique situation with an expert, let us know. We can help you determine if refinancing is the right move for you. Contact us at Advantage Home Plus at 1-800-376-4603 or at firstname.lastname@example.org