Refinancing

Refinancing means paying off your existing mortgage and replacing it with a new one. This process is similar to taking out your original mortgage.

Is Refinancing For You?

You should only refinance into a loan you can afford. It’s always better to be paying on the principal, not just interest-only. You can’t always count on refinancing again in the near future (2-3 years) to get out of a bad loan, so choose wisely. Beware of using all the equity in your home to pay off other debts, since your home’s value may drop during natural downturns in the market.

Reevaluate your decision on a regular basis. There may be constant changes in both your financial situation and the economy. If there is no need to refinance now, it may make more sense to refinance in a few years if that will save you more money.

When to Refinance

Most people refinance in order to lower monthly mortgage payments. If interest rates drop, refinancing should lower your mortgage payment. Other reasons include:

• Consolidate Debts: If you have loans to pay or credit card balances with high interest rates, you can combine these loans into one new mortgage.
• Lower the Risk on an Adjustable Rate Mortgage: Your home may have been affordable thanks to an ARM mortgage, but if there is a significant increase in the interest rate, it might be time to try a fixed-rate to reduce the risk of further increases.
• Reduce the Mortgage Term: When interest rates drop, you can also shorten the amount of time you will pay the mortgage while leaving the actual payment about the same.
• Use Your Home’s Equity: Instead of a home equity loan, you can refinance your home for an amount that is more than the remaining balance of your mortgage. This is called a “cash out” loan.

Keep in Mind:

• Refinance Fees: Refinancing your mortgage is not free. Make sure you have budgeted enough money for the upfront fees. If you can’t cover all of them, you may be able to include some of them in the new mortgage.
• Time: It can take up to 2 or 3 years to recover the costs of refinancing. If you plan to sell your house or pay it off shortly, you should probably not refinance.
• Change in Income: If your income increases significantly, you may be able to afford higher monthly payments. This can shorten the term of your mortgage. Refinancing is a good option if the current interest rate is lower for the shorter term mortgage.
• Adjustable Rate Mortgage: If your current loan is an ARM, but rates are the same or slightly higher for fixed-rate mortgages, then refinancing is a good idea.