When your inbox and mailbox are constantly flooded with offers to refinance, then it’s only natural to ask the question: Should I refinance my mortgage? Considering your situation, options, and goals carefully can help you make a smart choice.
Should I Refinance My Mortgage?
Some people consider it a bit rude to answer a question with a question. However, there are times where it can be worth putting aside concerns about politeness in favor of clarity. For example, are you posing the question: Should I refinance my mortgage? If so, we highly encourage you to ask yourself the following three questions:
What Would Be My Reason for Refinancing?
There are many reasons that people choose to refinance. Some are better than others. Identifying your goal and keeping it firmly in mind not only helps you to determine whether refinancing is a good choice but also helps you select the right loan product if you decide that it’s the right strategy for you. Forbes offers a list of common reasons for refinancing:
- Score a lower interest rate. When interest rates are headed down, refinancing lets you secure a lower rate that could potentially reduce your monthly mortgage rate and overall loan cost.
- Capitalize on an improved credit score. If your credit score has improved significantly since you got your mortgage, you may be able to qualify for a better interest rate and better terms. That may make refinancing worthwhile.
- Shorten your mortgage term. Why would you refinance into a mortgage with a shorter term? Loans with shorter terms typically have lower interest rates. While your monthly payment may be higher because of the compressed timeframe, you’ll ultimately pay less in interest over the life of your loan. This can produce significant savings.
- Lengthen your mortgage term. Refinancing to lengthen your mortgage term allows you to reduce your monthly mortgage payment. This is especially true if you also manage to secure a lower interest rate when you refinance. However, adding extra time to your loan will mean that you’ll pay more interest, so you’ll end up paying more for your loan.
- Convert your loan type. Refinancing allows you to swap from an adjustable-rate mortgage to a fixed-rate mortgage or vice-versa.
- Ditch mortgage insurance. FHA loans and some other loans require mortgage insurance for the life of the loan. The only way to get rid of the insurance is to refinance.
- Cash out equity. A cash-out refinance allows you to turn home equity into cash that you can use for home improvements, debt consolidation, investments, or other purposes.
Where Does My Mortgage Stand?
As MarketWatch indicates, not every homeowner stands to benefit equally from refinancing. Thanks to the way loans are repaid, refinancing delivers the greatest bang for your buck when it’s done early in the loan. At this point, much of the payment still goes toward interest, so securing a lower interest rate has the potential to save you a great deal of money. However, as the loan winds down, a shift occurs, and more of your payment goes toward paying down the principal. When this happens, scoring a lower interest rate will have less of an impact, so it may not be worth the investment of your resources.
Do I Have the Money, Time, and Credit to Refinance?
Refinancing isn’t free. While you may have the option to roll them into the loan, there are costs involved. You’ll also need to put in the time and effort and have your credit scrutinized. Is it worth it? To decide, Credit Karma suggests calculating the break-even point for your refinance. How do you do it? Take the total cost of your refinance. Divide it by the amount that you’re saving each month as a result of your refinance. The result will tell you how many months it will take you to break even. Are you planning to stay in your house that long? If you’re not, refinancing may not be a good idea because you’ll lose money. If you are, you’ll start saving money as soon as you pass the break-even point. Knowing that, you can decide if refinancing feels like a smart use of your resources.
Do you have questions about home loans or refinancing? PrimeLending West Texas has user-friendly answers and top-notch customer service. Contact us today for assistance.