Are advertisements and offers touting the benefits of refinancing popping up in your mailbox? It’s true that refinancing can be a smart move in the right situation. However, there are also times when you’re better off sticking with the loan that you already have. Why do people choose to refinance? When is refinancing worth it? And how can you tell whether or not you should refinance?
When Is Refinancing Worth It?
When you refinance a mortgage, you pay off your existing home loan and replace it with a new one. As Investopedia explains, there are many reasons why homeowners decide to refinance:
- Refinancing allows you to cash out some or all of the equity that you have in your home.
- Refinancing lets you switch between an adjustable-rate loan and a fixed-rate loan, so you can choose the type that best suits your needs and the market conditions.
- Refinancing for a lower interest rate or shorter term means that you’ll pay less in interest and build equity faster.
When Does Refinancing Make Sense?
When refinancing is likely to save you money, it’s worth considering. According to Credit Karma, there are a variety of situations where refinancing could be to your advantage.
For example, you might want to look into refinancing if mortgage rates have dropped substantially below your current rate, you plan to stay in the home long enough to see the savings from a lower rate, and paying off your existing loan early won’t trigger penalties. Do you have an adjustable-rate mortgage? In that case, you may want to refinance to secure a fixed-rate loan if interest rates are rising. Of course, interest rates aren’t the only factor to weigh. Has your credit score improved significantly? Has your property value climbed? If so, a refinance may help you get better loan terms. Do you want to cash out some of your equity to improve your home? Strategic remodeling that boosts your home’s value can offset the costs involved in refinancing and build your equity.
When Should I Avoid Refinancing?
If refinancing can improve the terms of your mortgage, why wouldn’t you do it?
There are costs involved with refinancing, so you’ll want to make sure that a refinance is worth the price. What about the opportunities to refinance with no out-of-pocket costs? The Balance suggests that you proceed with caution. While you may not be charged for closing costs upfront, you’ll still pay them. They’ll either take the form of a higher interest rate or be rolled into the new loan. You’ll also want to think carefully before refinancing if it will greatly extend the term of your mortgage. What about using a cash-out refinance to consolidate your debts? Again, be wary. While this may allow you to reduce you high-interest consumer debt and transform it into tax-deductible mortgage debt, it can put your home at risk.
Has your credit, income, or property value taken a hit since you got your home loan? Are you underwater on your current mortgage or short on equity? Any of these situations should serve as another refinancing red flag; you may find that you don’t qualify for a refinance.
Questions to Ask Before Refinancing
When is refinancing worth it? If you’re still struggling to come up with an answer, Money Under 30 suggests that you ask yourself a few questions:
- Have interest rates fallen far enough to make refinancing worthwhile?
- What will it cost me to refinance?
- Will I be in this home long enough to recoup the costs of refinancing?
- How much equity do I have in this home?
- If I’m cashing out some or all of my equity, is it worth the risk to my home?
Are you wondering if refinancing is right for you? Turn to PrimeLending of Wichita, Kansas. We thrive on empowering our customers. We’ll take the time to discuss your circumstances, learn what your goals are, and help you explore the possibilities so that you can find the best loan for your unique situation. While we offer a wide array of loan products, we keep things simple by offering a streamlined loan process and personalized guidance throughout your financing journey. Contact us today to take your first step.