When (and when not) to refinance your mortgage

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If you are a homeowner, unless you robbed a bank and paid your home in outright cash, you are most likely carrying mortgage or two on the home. You needed to secure a mortgage with a financial institution to purchase the home with a commitment to pay the mortgage back with interest and principal payments amortized over an agreed amount of time. You can pay this loan back on a fixed loan term or an adjustable loan term. Adjustable mortgages are riskier than fixed loans, but tend to get you lower interest rates. Your interest rate is based off of a few factors like credit score, current debt, credit history, etc. So you’ll thank your lucky stars you didn’t ruin your credit buying that sports car in your twenties to impress everyone who most likely wouldn’t be impressed anyways. Great credit equates to a great interest rate and savings on the cost of your loan.

As you nestle in to your new home, over time you may find yourself accruing more debt, or maybe your significant other picked up some expensive habits. Perhaps the house needs a little updating or the kids may be getting prepared to leave the home for college. Wherever life takes you after you secure your mortgage, you may find yourself becoming spread thin financially. Once where you saw a surplus, you now see a deficit. What some people are not aware of is their ability to leverage their home to get them out of financial binds in the form of refinancing. You can either refinance your current loan, or pull out a second mortgage on the home. Let’s talk about when you should and when you shouldn’t refinance. Here are some great mortgages and resource tools to get you started. 

Interest Rates Drop

When interest rates are low, this is an ideal time to refinance your mortgage. If you received a high interest rate when you first acquired the mortgage, you’d save yourself a bunch of money with a refinance. If you lowered your interest and paid the same amount you were paying with the higher interest rate, you could have your home paid off faster. You don’t want to refinance if you already have a very low rate, unless you are pulling cash out for something. Refinancing an already low rate will cost you a lot more money in the end, due to the costs associated with refinancing.

Shortening Your Loan Term

If you have an older mortgage, you may be a little hesitant to touch it. On the other hand, if you have an older mortgage, you may have a high interest rate, as rates are much lower than they’ve been. You could be paying on a high interest rate, where you could get a lower interest rate on a shorter term, and pay the same amount. The only difference is you’d be paying off your home in a much shorter term. Anywhere from 10 to 15 years. It’s not advised to go from a 15 to a 40+ just to save money because you’ll pay a lot more over the life of the loan, as opposed to paying it off in 15 years. Plus your interest rate will be higher.

Changing From Adjustable to Fixed

It’s a good idea if you are on an adjustable rate mortgage, to think about refinancing to a fixed rate mortgage. Adjustable rate mortgages are unpredictable, as they are adjustable to the market. We’ve all seen how easily politics can sway our markets and could potentially leave you in a bad place with your adjustable rate. It could adjust to where it's no longer affordable. This is why going from a fixed to an adjustable isn’t advised. If you are an investor and are holding the property for a short amount of time, this would be the exception for a short term adjustable loan.

Equity for Debt Consolidation

If you have a large amount of debt carrying high interests rates, it may be a good idea to consolidate all of your debt down to one low interest rate. Credit Cards have adjustable rates and can go as high as 30%. Consolidating all of your cards down to a 3-5% rate would save you tons of money. You could put that savings back into your mortgage payment to get it paid off sooner. This could also help with lowering your car payments and other areas for savings. If you have low interest credit cards and low interest on your car, refinancing to consolidate may not be a great idea. You’d be wasting money if you for instance, consolidated a 0% credit card on a 3.5% 30 year fixed mortgage. Everything you bought on that card all of a sudden became very expensive.

Before thinking about financing, do your due diligence and research on the current rates. Think about why you’d be refinancing and make sure it makes financial sense for you and your family. If you have a high interest rate or you just want to get your home paid off faster, don’t hesitate and look into refinancing today! 

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