You can refinance just about any loan, but doing so with a mortgage requires careful consideration. After all, paying off your existing home loan and replacing it could save you thousands. On the other hand, it could lead to foreclosure. Here are some reasons why people make this choice, along their related pros and cons.
Lower rates & better terms
The most common thinking behind refinancing is to get lower interest rates. However, if it’s only a marginal decrease, it’s likely not worth the switch. There are several expenses that go along with the process, including appraisals, processing, and application & origination fees. Make sure you factor these in before deciding.
Determine your break-even point by dividing the total closing costs by your estimated savings. For example, if you’re spending $200 less per month, but paying $4,000 in closing costs, it will take almost two years to break even. In this case, if you’re planning to move soon, it’s not the best idea.
Sometimes rates can fall low enough for homeowners to shorten their repayment periods and have only slightly higher mortgages. You’ll only want to do this if you’re at the beginning of your term or you’ll be starting all over again.
Lock it in
Adjustable-rate mortgages are for those seeking low initial rates that rise or fall with the market. If you have such a loan and you’re getting nervous about rising payments, you can refinance to a fixed product. On the flip side, you can usually change to an adjustable loan when rates are falling. This could be a good option if you’re not planning on staying in your house for more than a few years.
Some will refinance and tap into their equity. This can be a quick way to free up some cash for a large expense, such as remodeling or paying for school. Improvements do add value to a home, and an education may lead to a higher-paying job, but if you should be careful that it doesn’t bring along higher rates and longer terms.
And finally, some people refinance and use the equity to pay off other debts, such as credit card bills, car payments, student loans, etc. While a mortgage might bring a lower rate, you should only take this route if you can avoid getting back into debt again. If not, you’ll end up with the same problems, as well as a potentially problematic loan. Not to mention that you could lose your house if you don’t meet your obligations.
If you’re considering refinancing, the first step should be analyzing your existing mortgage and comparing it to your what’s available and what you might qualify to receive. This is easy with America First’s free online calculators.