Should I Refinance My Mortgage?
Mortgage terms normally span decades, so it’s a question that many homeowners will ask: Should I refinance my mortgage? There’s no one right answer. That’s because the best answer will depend on your goals and your circumstances.
Reasons for Refinancing
There are many reasons why people choose to refinance. Having a clear understanding of your goal is important. If you do decide to refinance, it should guide your choices as you select a refinancing product. Forbes offers a list of common reasons for refinancing:
- Securing a lower interest rate. Snagging a lower interest rate can mean a lower monthly payment and a lower total cost for your loan. Many homeowners jump at the chance to refinance when interest rates drop.
- Accessing home equity. Refinancing is a way to tap into home equity and get cash to consolidate debts, renovate your home, go back to school, or make other investments.
- Convert between an adjustable-rate and a fixed-rate mortgage. Adjustable-rate mortgages shift with the market, which can be stressful for homeowners who plan to stay put for the long term and are worried about higher interest rates. However, they often offer lower initial rates that can appeal to certain borrowers who don’t mind the risk. Refinancing offers a way to switch between the two types of home loans.
- Adjust the length of the mortgage term. When refinancing, there are two distinct approaches to the loan’s term. Some borrowers choose to refinance with a shorter term. This results in higher monthly payments but lower interest rates, so while you’ll pay a little more each month, you’ll pay for a shorter period of time, and you’ll pay less interest. Therefore, you’ll ultimately enjoy significant savings. Other borrowers take the opposite approach and refinance with a longer term. With this strategy, you’ll pay less each month, but you’ll pay more interest, so you’ll ultimately end up paying more for your loan.
Your Mortgage Situation
While your reason for refinancing is important, you’ll also need to weigh your circumstances. MarketWatch suggests thinking about these three factors:
- Your future plans. Refinancing has a price tag. In fact, the average cost is around $5,000. If you aren’t planning to be in your home for at least the next three years, you’re unlikely to recover the costs. Before you proceed, run the numbers to find your actual break-even point.
- Your principal balance. Borrowers with high principal balances benefit the most from refinancing. In the early years of a mortgage, most of the payment goes toward interest. As time passes, the pattern shifts, and the bulk of the payment goes toward the principal. Once this happens, lowering the interest rate won’t necessarily produce significant savings. You can either check your mortgage statement to see how your payment breaks down or speak with a financial expert to discover how much a lower interest rate will save you.
- Your finances and time. When you refinance, you must either come up with the cost now or add the price to your loan balance. You also have to be ready to invest the time and effort into gathering the necessary documentation. Are the potential savings worth the investment of your resources?
Whether you’re searching for a home loan or interested in refinancing, count on PrimeLending Dallas for user-friendly advice and assistance. Contact us today to explore your options.