Should You Refinance Your Home?
Chances are the home you own is the single most important investment you will ever have. Investing in the roof over your head is good move to make, and you can benefit from the price appreciation over time while you have a wonderful place to live and raise your family.
Unfortunately, that beautiful home probably came with a not so beautiful mortgage, and as time goes by and rates fluctuate, you may wonder if refinancing is the smart thing to do. There are a number of things to consider when refinancing a mortgage, and it is important to weigh the pros and cons carefully.
Lower Your Interest Rate
The most obvious reason to refinance your mortgage is to lower your interest rate. If rates were high when you bought your home and have fallen since then, chances are a refinance could save you money.
A lower interest rate can result in a lower mortgage payment, a shorter loan term, or both. When you refinance your home, you are paying off your existing loan and replacing it with a new one. If that new loan carries a lower interest rate, you can save money in the process.
A good rule of thumb for refinancing is that it is usually the right thing to do if you can lower your interest rate by 2% or more. If your current mortgage is 6% and the prevailing rate is less than 4%, pursuing a refinancing deal would be worth your time and effort.
Lowering your interest rate has the potential to save you several hundred dollars a month, money you can invest for retirement, put in the kids’ college funds or just enjoy. Those savings can really add up over time, reducing your total outlay by tens of thousands of dollars.
Shortening the Loan Term
Refinancing your mortgage could also help you reduce the length of the term, something that could be very important if you are in or approaching retirement. Many people prefer to enter retirement mortgage free, and many financial advisors recommend paying off the mortgage before exiting the workforce.
Even if refinancing the mortgage does not lower your monthly payment, it could benefit you in other ways. If you can reduce the term of the new loan, you could pay off your home years ahead of schedule, freeing up money you would otherwise have put toward housing expenses.
When refinancing your mortgage, you may be offered an adjustable rate mortgage, also known as an ARM. While an ARM can be a good deal, you should proceed with caution and understand the implications down the road.
While the interest rate on an ARM starts out lower than a fixed-rate mortgage, that rate is subject to change. If interest rates rise, you could be facing a much higher monthly payment than you anticipated.
Converting into an ARM may be a good idea if you do not expect to stay in your home for more than a few years. For instance, if you plan to retire and move to Florida, refinancing into an ARM could save you money, and by the time the initial interest rate resets, you will be long gone.
Tapping Equity and Consolidating Debt
Refinancing your mortgage can also help you tap the equity in the home and consolidate your debt. If you have high levels of credit card debt, refinancing your existing loan could free up cash to pay off those bills, giving you a fresh start and helping you enjoy a more secure financial future.
Many homeowners also use refinancing to pay for needed home repairs or improvements. That can make sense, especially if the remodeling adds value to the home. But whether you use your mortgage refinance to remodel or pay off debt, it is important to exercise financial discipline and establish a proper budget. If you fail to do so, you could end up back in debt.
The decision to refinance your mortgage is a highly personal one, and it is important to weigh the pros and cons carefully. Deciding why you want to refinance, how you will refinance and how much money you can save is the best way to make a sound financial decision.
At Haynes Brothers Furniture, we want you to make the best decision for your family and home. Remember to consider all the options and factor all your needs before refinancing.
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