When you can no longer meet your monthly house payments, you may consider refinancing your mortgage. Refinancing can be helpful for many families, but it isn’t right for everyone. Let’s go over some situations when you should refinance your home-and times when you shouldn’t.
Reasons to Refinance
If you want to refinance, you’re probably dissatisfied with something about your mortgage. Here are some of the reasons why people choose to refinance.
You Want a Lower Interest Rate
Refinancing your loan can get you a better interest rate, and thus a more affordable monthly payment. If you’re struggling to make your mortgage payments, ask a mortgage broker how much you might save by refinancing.
You Want to Shorten the Loan’s Term
Maybe you have a 30-year mortgage and you’d prefer to pay off your mortgage in fifteen years. You can refinance to get a new loan. Because your interest rates will be lower with the shorter loan, your monthly payments probably won’t change much.
You’d Benefit from Changing the Mortgage Type
Some people refinance to change their fixed-rate mortgage to an adjustable-rate mortgage, and vice versa.
Adjustable-rate mortgage rates may go up over time, making the homeowner uncomfortable. He or she may wish to change to a fixed-rate mortgage to avoid worrying about increasing rates.
On the other hand, adjustable-rate mortgages can be much more affordable than fixed-rate mortgages, depending on the state of the housing market. A homeowner may wish to save money by switching to an adjustable-rate mortgage.
You Want to Remove Private Mortgage Insurance
If you couldn’t make a 20% down payment when you bought your house, you most likely took out private mortgage insurance. Perhaps you’ve come to a point where you no longer need the private mortgage insurance. In this case, you can cancel it with a refinance loan.
When Not To Refinance
Before you call a mortgage broker, make sure refinancing is the right choice for you. If the following situations apply, you may not want to refinance.
You’re Trying to Pay Off Debt
If you’re in debt, you can refinance to consolidate your debt, making it easier to pay it off. But this isn’t the best decision for everyone. People with poor spending habits still have those habits when they refinance their home. Refinancing gives them credit to keep spending, which simply puts them into more debt.
With the new loan, it’s possible that they’ll lose more money over time. Ask a mortgage broker about your best option in this situation.
You’re Going to Move in the Next Few Years
When you refinance your home, there are costs involved. These include:
- Mortgage company fee
- Bank fee
- Attorney costs
Ideally, the savings from your new mortgage will help you pay for these costs over time. But if you’re moving soon, you won’t have enough time to absorb the costs.
You Won’t Save Money in the Long Run
When you refinance, you need to figure out whether it will actually benefit you financially. To do so, add up all the refinancing fees. Then calculate how much you’ll save on your mortgage per month after refinancing.
Take the first number and divide it by the second number, and that will tell you how many months it’ll take you to break even. If you’re going to stay in your house that long, refinancing might be a good idea. If you’re not, you may want to avoid it.
If you’re still unsure whether refinancing is right for you, talk to a mortgage broker. He or she can look more closely at your specific situation and help you decide the next best step.