Should I Refinance My Mortgage?

Refinancing your mortgage means getting a new mortgage to pay off your old mortgage. In other words, you’re getting a new loan on your house to pay off an existing one, and many people get refinancing for various reasons.

First of all, it’s easier to get refinancing than securing another loan. Other reasons include getting a lower interest rate, shortening your mortgage term, switching your loan terms, consolidating debt, or to raise funds. 

However, one thing you should remember is this: Refinancing can either save you money or cost you money. Refinancing interest rates range from 3% to 6% the loan’s principal and it will also incur application fees.

Refinancing would also entail title search and an appraisal. With all of these into consideration, when is it wise to refinance your mortgage and when is it unwise to do so? Let’s find out below. 

Instances When Refinancing Your Mortgage Makes Sense 

There are a number of situations when taking a refinancing agreement makes sense. These include: 

Refinancing Your Mortgage to Lower Your Interest Rate

The no. 1 reason you should refinance your mortgage is to lower your interest rate. The rule of thumb here is to refinance if you can reduce your current interest rate by 1% or more. In this way, you can save money. You can use a mortgage calculator, such as this one from Investopedia, to calculate the costs of refinancing. 

Other benefits for entering a refinancing agreement when current interest rates are low is to build your home equity faster. Equity is the fair market value of your house minus the amount you still owe. You build equity by paying off the loan principal or making payments on your mortgage. 

In addition, refinanced mortgages at lower interest rates can also reduce your monthly payment. For instance, imagine keeping $100 that used to go to mortgage payment every month – It can go a long way. In a year, you’ll have saved $1,200!

Refinancing Your Mortgage to Shorten Your Mortgage Term

Another good reason to enter a refinancing agreement is to shorten your mortgage term.

When you do this, you can own your house sooner. Typically, shortening your mortgage term results in lower interest rates but an increase in monthly payments. So, it’s essential that you do the math first before signing on a refinancing agreement to ensure you can afford the new monthly payments. 

Refinancing Your Mortgage to Lengthen Your Mortgage Term

Refinancing your mortgage may also be a wise move if there’s been a change in your income and you are having trouble making the monthly payments. With a refinance agreement, you can lengthen the term of your mortgage to lower your monthly payments to a more affordable amount. However, bear in mind that the new loan may have a slightly higher interest rate and you’ll likely end up paying more interest over time. But, it does free up some cash that you can use for other things, such as necessities or investments. 

Refinancing Your Mortgage for Renovations or Home Improvements

If you’ve been living in your house for several years now, chances are that something needs fixing or updating, such as a broken HVAC or outdated kitchen or bathroom fixtures. These upgrades can add curb appeal and increase your house’s value so that you can get more money when it’s time to sell your house. 

While you could get a personal loan or charge your credit card for home improvements or renovations, a cash-out refinance typically has a lower interest rate. Just remember that you should get an estimate from contractors and other repair professionals so you don’t end up taking too much or too little cash from the refinancing. 

Refinancing Your Mortgage to Increase Your Retirement Savings

If you haven’t maxed out your annual retirement contribution limits, you could take on a refinancing agreement to do so. You can use the money from a cash-out refinance and invest it into your retirement savings.

Refinancing in These Situations Can Be Good or Bad –  It Depends 

There are a couple instances when refinancing your mortgage can be wise or unwise, depending on several factors. You’ll have to examine your particular situation, do the math, and decide if a refinance makes sense for you or not.

Switching loan terms

When you mortgage your house, you can do so either as an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. The difference between the two lies in the interest rate applied to your loan. ARM typically has a lower interest rate at the start of the loan but it fluctuates after several years due to periodic adjustments and the change isn’t always in your favor, whereas a fixed-rate mortgage applies a fixed interest on your loan throughout its term. 

You might want to switch from ARM to a fixed-rate mortgage to eliminate the risk of paying a higher interest rate. Conversely, a switch from fixed-rate to ARM may be a smart move when interest rates are dropping or you plan to sell your home before the interest rate increases, but it involves some risk.

Should I Refinance My Mortgage?

Ultimately, the decision to convert from one mortgage type to another really depends on the interest rates and how long you plan to stay in your house.