When is it actually a good idea to refinance, and how does one do that? Refinancing a mortgage is essentially trading in your current mortgage for a newer one. Most people refinance to get a lower interest rate, but you might even refinance to change your 30 year mortgage to a 15 year one. Raising your monthly payments, yes, but making it so that there will be fewer of them and, ultimately, less interest to pay.
When might it be a smart move for you to refinance?
You want to have smaller monthly payments.
Reducing your mortgage’s interest rate will reduce your monthly payments. Ideally, you will have a good credit score before you start this venture. The better your credit, the better interest rates you will be offered by lenders. It is definitely a smart plan to check your credit score before you go any further with refinancing.
You want to shorten the length of your loan.
Did you come into some money? Maybe you got a raise at work? Or maybe you just don’t want to still be paying into your mortgage during your retirement. Looking ahead and planning for the future might be a reason you want to refinance. Most people aim to own their home with no mortgage payments by the time they retire, even if that means biting the bullet with much larger payments in the now.
When is it not a great idea to move forward with refinancing?
You’ll be moving sooner rather than later.
There are some costs with refinancing that you might not be aware of, like closing costs. If you don’t think you’ll be in your current home long enough to recoup the closing costs for the refinancing, then don’t do it. Say your closing costs are $2500 and you are refinancing to have your monthly payments be $100 lower… it will take you 25 months to break even from those closing costs. Make sure that your refinancing, and all the costs associated with it, will be worth it in the long run.
How much can you really reduce your payments?
If you are not able to reduce your loan’s interest rate by at least 1 percentage point, then this is not a smart move for you. Going through all the trouble of refinancing may not actually be worth it for your financial well being. How can you find this out before you really go through some hassle? There are online calculators to help you figure this out before you make a big move.
Refinancing can actually be a good move for the overall health of your financial status, but make sure you do all your research first before taking steps you might regret!