When to Refinance a Mortgage?
Refinancing your mortgage is a major financial decision to take, and before you take such a decision, you must weigh its pros and cons. While there are a number of benefits associated with refinancing mortgages, it isn’t always the best decision to take.
Homeowners who refinance their home mortgages several times will be spending more than they can ever hope to save; moreover, they will have to lose a lot of money in closing costs. This, however, does not mean that refinancing is a bad financial decision to make as a rule; it simply means that refinancing mortgages is a sound financial decision only when homeowners know exactly when to refinance their mortgages.
Identify Your Goals
Before you decide to refinance your mortgage, you must invest some time in identifying your financial goals. Try to find answers to questions such as how much you expect to save by refinancing your mortgage.
You cannot say good-bye to your mortgage just by refinancing it; you can only give it a new shape and structure. If you are lucky, you will get a lower rate of interest and more time to pay it off, but on second thoughts, you might end up paying more in the form of interest on the long run. In this case, refinancing makes no sense if your goal is to save money on rates of interest.
On the other hand, if you are in financial difficulties or struggling with a low credit score, you will feel grateful for the low rates of interest, the lowered monthly payment, and extra time to pay it off.
Identifying one’s financial goals and exactly what one hopes to achieve by refinancing mortgages is, therefore, of great importance.
Here are few factors people usually consider before refinancing their mortgages.
Interest Rates
Homeowners might refinance their mortgages either to get into or out of an Adjustable Rate Mortgage (ARM). ARMs are preferable when interest rates are generally high because they are more affordable than fixed rate mortgages. However, when interest rates are generally lower, homeowners prefer fixed rate mortgages because they give them the advantage of fixed rates throughout the term of the mortgage.
Homeowners might, therefore, choose to refinance their mortgages to get a better, affordable rate of interest.
Closing Costs
If you don’t plan to continue living in the house, refinancing makes no sense because you have to consider the costs of closing your existing mortgage. On an average, the costs of closing a mortgage loan of $200k is $3,118 plus taxes, insurance dues, prorated interest, homeowner association dues, and so on. If you cannot somehow recover the closing costs by refinancing, you will be defeating the very purpose of refinancing your mortgage, if you are doing it to cut costs and save yourself some money.
The decision to refinance your mortgage simply cannot be taken in a hurry. You have to carefully weigh the pros and cons of refinancing your existing mortgage and also consider factors such as credit history and prepayment penalties.