Should You Refinance Your Mortgage?
If you’re a homeowner with a mortgage (which you probably are if you’re reading this), there’s probably one word that’s top of mind right now: “Refinance.” And for a good reason. With rates near historic lows, there’s a good chance you could save money by locking in a lower interest rate.
If you’re considering refinancing your mortgage, but you’re still unsure if it’s the right move, don’t worry – here are some things to consider before making the move:
First, let’s cover the basics. What is a mortgage refinance (or refi)? When you refinance your mortgage, you’re basically replacing your current mortgage (typically with better terms). Your new loan is then used to pay off the original, and you’re responsible for paying the new one.
When should I consider refinancing my mortgage? Picture this. You’ve been living in your home for a few years. Since then, your credit score has improved, you received a promotion at work and rates have lowered since you purchased your home. If this sounds like you, it may be a good time to refinance your mortgage.
You may also want to consider refinancing if you want to shorten or extend the life of your loan. When you shorten the length of your loan, you pay off your loan faster (potentially saving a good chunk of interest). While increasing the length of your loan can make monthly payments lower and more manageable.
When is refinancing not a good idea? While there are plenty of reasons you would want to refinance, there are also reasons why it may not be a good move:
- If you’re looking to move soon. When you refinance, there are usually closing costs you have to pay, which are typically 2-3% of the loan amount. If you're going to save $100 a month but will have to pay closing costs of $3,000, you'll need to stay in the home for more than 30 months to come out ahead.
- You’re eager to renovate. Refinancing and taking some cash out can help you renovate your straight-out-of-the-1970s bathroom or finally getting that new kitchen you’ve been dreaming of. Just be careful to avoid projects that won’t add value to your home. If you’re going to be taking on more debt, you’ll want to feel confident you’ll get your money back on your remodel investment once it comes time to sell your home in the future.
- It may have an affect on your credit. Since refinancing requires applying for a new loan, lenders will pull your credit report through a hard inquiry (which could have a slight negative impact on your credit score). Don’t let this keep you from exploring loan options though. If you’re shopping around for rates, all inquiries will only be counted as one hard inquiry (typically two weeks to 45 days).
Refinancing is not something to be done on a whim. Before you dive into the process, consider what you hope to achieve and your own personal financial situation. If the time is right, refinancing could help you pay less interest over time or help you obtain a more manageable monthly payment.