When Should You Refinance a Home?
When you refinance a home, you replace your mortgage with a new home loan with different terms. Many people decide to refinance to get better terms -- and, while there are a variety of refinancing options, if you like your mortgage, you probably don’t need to refinance.
The specific terms you’ll be offered on a home refinance can vary based on specific factors like location, political stability, inherent risk (economic factors), projected risk, currency stability, personal credit, banking regulations, and the equity in your home. While the most common form of refinancing is for primary residences, you can also refinance second homes or investment properties.
Why Refinance Your Home?
Sometimes refinancing your home is a really smart step to take. Here are a few reasons why people generally refinance:
Better interest rate: Many people refinance because there may be a better interest rate, which typically means a reduced monthly payment.
Consolidate other debts: If you have a variety of high-interest debts, such as balances on multiple credit cards, you may want to hire a debt consolidation company in order to reduce and streamline your debts into a single monthly payment. Since a refinance can lead to lower interest rates (and therefore increased cash flow), it may make it easier to for you to pay this reduced monthly payment. Despite that, it’s important to realize that some companies advertise debt consolidation without actually rendering services (i.e. they could rip you off!) That’s why it’s essential to do you research before paying anyone money.
Reduce monthly repayment amount: For example, if you had to take a pay cut from work and you didn’t know how long it would take you to get back to your usual salary, then you might opt for a longer term of the loan (like from a 15-year loan to a 30-year loan). Refinancing to a longer term loan lowers the amount you pay monthly. And if your financial setback is just temporary, you can always consider refinancing back to a shorter term loan.
Reduce interest rate: For example, if you got a promotion and you want to pay off your mortgage sooner in order to not pay as much interest, then you can refinance your mortgage to fix these terms (like turning a 30-year mortgage into a 15-year mortgage).
Reduce risk: If you want to reduce your risk and keep your mortgage payments steady, you can also refinance an adjustable-rate mortgage into a fixed-rate home loan. That way, you’ll never have to worry about your payments going up simply due to changes in the market.
Free up some cash: If you need to take some cash to pay your bills, you might also want to consider a cash-out refinance. While this can provide you the necessary funds, it usually results in a longer-term (and sometimes higher interest rates).
In the U.S., you don’t usually pay any upfront fees to refinance your mortgage. Remember, refinancing can be the most beneficial when current market interest rates are substantially lower than the rate you’re currently paying. As with all things home loans, it’s important to do your homework.