Is Refinancing The Best Option?
Refinancing a mortgage makes sense in some situations. Whether or not it is the right decision is based on several factors, including your current mortgage's terms and if you plan to move in the near future. If you are thinking of refinancing, here are some situations in which it makes sense and when it does not.
When Should You Refinance?
One of the most important factors to consider when assessing whether or not you should refinance is the term of your current mortgage. For instance, if you have a 30-year mortgage and you can refinance for a shorter period, it might be worth it. However, you need to also consider the interest rate.
A shorter term combined with a lower interest rate can be beneficial to you. Even though your mortgage will increase to accommodate for the shorter term, the lower interest rate could mean that the increase will be small enough to fit into your budget.
You should also consider refinancing your mortgage if you currently have an adjustable-rate mortgage. When you refinance, you can opt for a fixed-rate mortgage, get a better interest rate, and save money. You do not have to worry about fluctuating payments and you'll know what to expect from month-to-month.
If you want to take advantage of equity in your home, refinancing is a good option to do so. You can use the cash received to make financial moves, such as buying an investment property. Before exercising this option though, it is important to carefully assess what you plan to do with the cash received.
When Should You Not Refinance?
Although refinancing is a good option in some situations, it is not in all. For instance, if you are planning to move to a new home in the next few years, refinancing is not a good move. The savings from refinancing most likely will not be more than the costs associated with the process.
You are responsible for paying closing costs when you refinance. If you are unable to afford those costs, it is possible that your lender will allow you to factor it into your new mortgage, but there is a downside to doing so. The costs could make your mortgage higher and take away from the savings you were hoping to gain.
If you have bad credit, attempting to refinance might prove challenging. Lenders might shy away from refinancing the mortgage. Even if you find a lender, the interest rates offered might result in a smaller saving than you hoped.
Talk with a financial expert to determine whether or not refinancing is best in your particular situation.
