The Ins and Outs of Refinancing Your Mortgage

A mortgage is one of the largest financial obligations you will make in your lifetime.

Oct 9, 2013

A mortgage is one of the largest financial obligations you will make in your lifetime, and when your financial circumstances change, you might consider refinancing your existing agreement. There are any number of reasons you may choose to refinance.

In addition, your lender may offer any of the below changes to your contract to help you reach your goals:

  • Obtain a lower mortgage rate to reduce payments
  • Extend your repayment term to lower your monthly mortgage payments
  • Shorten your repayment term to pay off your principal balance more quickly
  • Combine a first mortgage and home equity loan into a single monthly payment

The option to refinance should be weighed carefully, as there are many pros and cons to this decision. In some cases, switching to lower mortgage rates multiple times might not be in your best interest, namely because you may incur high closing costs for each transaction.

In other cases, extending your repayment period or getting locked into a lower rate can reduce your monthly mortgage payments and help you manage your balance more easily. This can also free up more income to put toward savings, retirement or other categories.

To help you make the best decision for your circumstances, ask yourself the below questions:

1. What is my goal?

It’s important to understand what you’re trying to accomplish by refinancing your current terms before making the decision. You might find that the costs associated with refinancing outweigh the benefits, especially if you are close to paying off your loan. In other cases, it may actually improve your financial condition.

2. Do you qualify for a good rate?

Several factors may impact the interest rate for which you qualify, including your credit score, finances and the lender you choose. Comparing costs and working with a financial institution that wants to help you get the most affordable rate can play a large role in your decision to refinance.

3. Are you seeking a fixed or adjustable-rate mortgage?

Your financial stability may drive the type of interest rate you are seeking out, so speaking to a lender can help you weigh the pros and cons. For instance, if you’re seeking to lower your payments and follow a strict budget, a fixed-rate mortgage may help you accomplish this. If your finances are primarily stable and you’re seeking to pay off your loan more quickly by making larger payments, an ARM may be something to consider.


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