Is Now a Good Time to Refinance My Mortgage?
Mortgage rates are at historic lows, and with the economy recovering, many homeowners are choosing to refinance for a variety of reasons.
While there are some pitfalls for each reason to refinance, many homeowners are able to accomplish their financial goals thanks to a well-timed refinance. This list of the most common reasons to choose to refinance – and the pitfalls to watch for in each – will help homeowners determine whether refinancing their mortgage is the right move for them.
Locking in a Lower Rate
One of the most common reasons for refinancing is to lock in a low rate. Because of the recent economic downturn and housing crisis, lenders have been offering historically low rates in the past few years. Within the last year, rates have begun to climb again, but are still substantially lower than in the past. Homeowners who are approximately ten years into a mortgage in particular may stand to gain from refinancing, as rates in 2004 were higher than those of today.
Be aware that closing costs must be paid again when refinancing, which can eat into the savings. Refinancing may be more expensive than continuing to pay on the current loan.
Pulling Out Equity
If you have positive equity in your home – meaning that you owe less than the home is worth – you may be eligible to pull this equity out by extending your loan. This money can then be used to pay off debts, make investments, pay for school or anything else that homeowners need money for. This tactic can be particularly useful for paying off high-interest debt, as the sum can then be paid off at mortgage interest rates. Naturally, this increases the remaining repayment period, monthly payments or both. Using the money from a “cash-out” refinance for an investment that yields at or just above the interest rate on the home loan is likely to result in a net loss.
Switching Out of an ARM
Many homeowners initially choose an adjustable-rate mortgage, as the rates on these home loans tend to be lower than the rates on fixed-rate mortgages. This is a good strategy for short-term homeowners, or homeowners who anticipate interest rates going down, as an ARM follows market interest rates, but is not optimal in a market in which interest rates are increasing. For this reason, many homeowners choose to refinance to a fixed-rate mortgage when rates are low in order to “lock in” a low rate.
Shortening Loan Terms
Homeowners who are earning more money now than when they took out their home loan may be interested in shortening their loan term. This can be done in two ways: A “cash-in” refinance allows borrowers to bring cash to closing, while a regular refinance can be used to choose a shorter repayment period with higher monthly payments. Be aware that borrowers still must pay closing costs again, and that changes in income level might lead to payments that are more difficult to meet.
Lowering Monthly Payments
Borrowers who are having trouble making their monthly payments may be able to lower them by extending their repayment period. While this almost always results in more money in interest over the repayment period of the loan, barring situations in which the owner is refinancing from a very high interest rate to a very low one, it can be an effective money management tool for homeowners whose circumstances have changed since they took out their loans.
Refinancing isn’t for everyone, but it can be an excellent financial tool when used correctly.