Home Buying

Is Home Refinancing in your Best Interest?

Thanks to low interest rates and economic difficulties, millions of people have taken advantage of the option to refinance their mortgages in order to get a leg up. While borrowing can be a smart move if done for the right reasons, there are certain pitfalls that can come along with such a decision.

Home refinancing hit its highest mark of all time in 2003 and has continued to increase in demand, in many ways, since that time. While refinancing can reduce your costs on the whole, it isn’t always a strategy that works for every household in every situation. That is why it is necessary to consider your unique situation, weigh the pros and cons, and make the decision that is right for you.

Before setting your decision for home refinancing in stone, consider the following benefits and concerns that come along with refinanced mortgages:

To Refinance or Not to Refinance

For years, the idea was that refinancing only made sense if you could find a way to cut your interest by at least two percentage points. However, there is a new train of thought which may be far better to follow. The concept now is that it is far more important to figure out how many years it will take to break even, and understand how long you will feel comfortable living in your home, than focusing solely on percentages.

For example, you have to consider the savings you will have each month thanks to your new interest rate, but also consider the new closing costs you will have to pay. If you end up saving $250 a month, but your closing costs are $2,000, then it is going to take 8 months in order to break even. If you intend to live in your home for more than 8 months, then home refinancing could be a good idea. If not, then there isn’t much point in going through the effort.

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All Mortgages are Different

While interest rates and APRs are the main numbers people consider when refinancing, it is important that you do not make a decision based on only those numbers. There are a number of other variables that come with mortgages, including:

Mortgage Terms: The terms are an important variable for mortgages as it indicates how long it will take to pay off the interest and principal of the loan. Short term mortgages normally come with lower interest rates but can often mean higher payments each month.

Interest Rate Variability: When setting up your mortgage you have two options when it comes to interest rates. There are variable rates, and then there are fixed rates. Variable rates tend to come with lower rates at the start but can jump incredibly high down the road. If your plans are to stay in your home for a long period of time, then the security of a fixed rate can be beneficial. But if you are considering selling your home in a few years, then a variable rate may be your best bet.

Keep in mind that interest rates are incredibly low right now, but may be on the rise for the years to come.

Fees: There are certain discount fees that are paid to a mortgage broker when you finalize a deal in some mortgages, while other mortgages come with no initial fees. While the no-fee mortgages seem to be the best bet at first, they can end up costing more money in the long run if it means the deal comes with a higher interest rate.

While there are many lenders, companies, and brokers offering to refinance your mortgage, your current lender already has all your information, which can cut down on a lot of the work. This might make the process easier for you, but should not be your only consideration. To ensure you make the right decision, you must comparison shop, weigh your options, and ask as many questions as possible.

Ready to Refinance?

If you decide that you are ready for home refinancing then, there are a few steps you should always take.

  • Be sure to shop around, make notes on the entire cost process, and weigh the short and long term benefits of your choice. Finance professionals can be a great help in ensuring that you get the most financial benefits possible.
  • Always read every detail of the contract before finalizing a deal. Never rush into a decision, and if you don’t feel comfortable, then simply back away and look somewhere else.
  • Make use of the savings that refinancing your mortgage will bring. Put the extra savings towards retirement savings or paying off credit cards to ensure that your refinancing is a great long term investment.
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