Before you decide on a major financial decision such as refinancing your home, you should take the time to understand the costs involved (they are usually significant) and weigh them against what you expect to gain from the refinance. While each situation is unique, there are a few general guidelines you can use to help decide if you should refinance your home.
What is Your Goal for Refinancing Your Home
Refinancing a home mortgage is simply the restructuring of the debt so that you, the home owner, can get some sort of benefit. These benefits, or goals for the home owner, are varied and with each different goal there are different variables to evaluate. The most common reasons to refinance include:
- Lower interest rates
- Increase or decrease loan term
- Debt consolidation
- Change rate type
What is your goal? This is the first step and you should clearly understand why you want to refinance.
Reduced Interest Rates
Seeking out lower interest rates is the number one reason for refinancing a home. When deciding if you should refinance, look at the current interest rates and compare them with what you are paying now. If you can drop that rate by one point or more, then strongly consider the refinance. However, you also need to look at the overall cost of the refinance and how long you intend to stay in your home. The calculation is rather simple; find out how long it will take for you to save the money you are spending to refinance. If you intend to remain in your home past that time period, then a refinance could be the answer for you.
Change Length of Mortgage
Most home mortgage loans are either 15 year or 30 year mortgages. A 30 year mortgage gives you a lower monthly payment, but a higher interest rate and a higher overall cost of financing your home. If you can afford to pay the monthly payments on a 15 year loan, it is a better financial decision, but you must be sure you can make that payment. If you are looking to turn a 15 year into a 30 year, pay close attention to those interest rates. Shop around as much as possible to keep those rates as close as possible to your current rates. Turning a 15 year into a 30 year is a tough decision but one that sometimes must be made if you cannot afford the monthly payments.
It is easy to build up debt as the years go by, and in many cases that debt will be subject to a higher interest rate than what you have on your home. If you can refinance and roll qualifying debt into your home mortgage, you can save a lot on interest. You will probably find that you save significantly, but ask yourself if you save enough to cover the refinancing costs?
Changing Rate Structure
Mortgage loans come with various rate structures, the most common being fixed rate and adjustable rate. If interest rates have dropped to near all-time lows, then moving from an adjustable rate to a fixed rate, is usually a great idea. If rates are high, you may want to consider switching to an adjustable rate because the chances are better that your payments will go down rather than up.
Always remember to calculate the cost to refinance when asking should I refinance my home. It can cost anywhere from $2,000 to $6,000 (possibly more) to refinance a home and it makes a huge difference when deciding to refinance or not. You will also have to notify your homeowners insurance company of the change as they report coverage details to your lender.