When Should You Refinance a Home?
Refinancing your home means finding a bank or lender that will pay off your existing loan and replace it with theirs. Owners can refinance for many different reasons. They may feel like they are paying too much in interest if the rate is high, they want to pay it off faster and want a shorter term, or they may be on an adjustable-rate mortgage and want to switch to a fixed-rate or the reverse. Use a house payment calculator to estimate what your new monthly mortgage payments might be by switching to a different bank or lender.
Lower Interest Rate
Who isn’t attracted to lower interest rates? If this is why you are refinancing, it’s most likely because you realize you are spending way too much on interest. For example, at the end of a 30 to 35-year loan term, the holder of a loan with an interest rate of over 4 percent will have paid roughly an extra $10,000 over the life of the loan, as compared to the holder of a 4 or lower percent interest rate mortgage. Clearly, the biggest benefit of refinancing is the opportunity to lower your interest rate and save thousands of dollars!
Shorten the Term of Mortgage
You may be in a better financial spot than you were when you first got your mortgage where you had to take a lengthier term to pay it off. If you want to pay off your mortgage and become debt-free quicker, you can refinance to get a shorter term. A scary thought can be the higher payment that comes with a shortened term mortgage. If that is the case, consider these options with your existing mortgage:
Pay extra each month or more often.
Make an extra payment a few times a year.
Convert from ARM to Fixed Rate
ARMs are ideal for those who only want to live in their home for a short period of time. You may have a longer-term goal where you may need to live in another state and you bought a house only for the short-term. However, if that is not the case for you, consider a fixed-rate mortgage. Refinancing to a fixed-rate loan is logical if you get a really low-interest rate. Obviously, no one has a crystal ball to predict what will happen with the market and fluctuation of the interest rates on a loan. That is a perk of the fixed-rate loan, you don’t have to worry about the fluctuation.
Tap Into Home Equity
There are some great advantages of using cash-out refinance for a loan if you need a big amount of money fast and have no other way to come up with it. It’s safe to say that the home you buy if you don’t build, isn’t exactly your dream home. You will likely want to make improvements to it. This will increase the value of your home and allow you to make some money if you decide to tap into the equity.