Make sure the time is right for your home refinance
There are several good reasons for refinancing your existing loan –
there are also a few bad ones. When deciding if the time is right to refinance, you need
to first figure out why you’re refinancing. Your situation may be one or a combination
of these reasons.
Take advantage of lower rates
See if today’s rates make refinancing worthwhile.
The rule of thumb used to be that if rates are 2% lower than your current interest rate,
then refinance. It’s not always that simple because every situation is unique. You may
be paying down discount points or have a prepayment penalty that makes refinancing too costly.
We’ll help you do some quick calculations to see if the rates have dropped enough to
make refinancing advantageous for you. Plug in your current loan numbers and today’s
rates to see if you’re better off refinancing or sticking with your current loan.
Consolidate debts
This can be a good reason to refinance as long as you’re not setting a trend. If
you’re paying a lot of high-interest debts and have enough equity in your home,
refinancing might make sense. What doesn’t make sense is to consolidate your debts
using your equity and then take on more debt and do it all over again. This cycle eats up
the equity you’ve built in your home. Don’t use refinancing as a way to live beyond
your means – it will catch up with you eventually.
Cash out
If you’ve built enough equity and want extra cash, your home can often provide it.
Taking advantage of your low mortgage interest rate is often a better alternative than
using your credit cards. If you’re cashing out for home improvements, you can even keep
the tax deductions. Cashing out means you’re financing more than your original amount so
make sure you can afford the new monthly payment.
Avoid a payment shock
See what refinancing really costs.
If your ARM is about to adjust, you could be in for a payment shock. A common way to
avoid paying high rates after an ARM adjusts is to refinance to another ARM or a fixed-rate
loan. When determining if you should refinance to avoid a payment shock you need to understand
the costs of refinancing. This will help you weigh your options based on actual numbers.
Move for less
If you know that you are going to move in a few years, it might be worth it to switch
from your high-rate fixed mortgage into a low-rate ARM. You can lower your monthly payments and
move before you get hit with an adjustment. Just be sure you are going to move or this
plan can backfire.
Don’t forget about taxes
Another consideration when refinancing is how your taxes will be affected. This can often
be an afterthought, but if you refinance to take advantage of a lower rate, you’ll be
paying less each month in mortgage, but more in taxes. The tax deductions may outweigh the
monthly savings or vice versa. Find out how your taxes will be affected.
See if your tax deductions make your mortgage worth keeping.
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