Here are a few reasons many homeowners decide to refinance:
1) To take advantage of lower interest rates
Many lenders claim that even a 1% savings on interest rates should be reason enough to refinance. Reducing your interest rate can help you build more equity in your home sooner and decrease the size of your monthly payment, saving you lots of money.
2) To shorten the life of their loan
If you have a mortgage with a really high interest rate, refinancing can help you pay off your loan in half the time without changing your monthly payment much.
3) To convert between adjustable-rate and fixed-rate mortgages
Over time, adjustments can increase the rates on Adjustable Rate Mortgages (ARMs) until they top the going rate for fixed-rate mortgages. When this happens, switching to a fixed-rate mortgage is a good idea.
When refinancing is a bad idea:
- When you need money to pull you out of debt – Most people who refinance for this reason end up spending all the money they save, and then some.
- When a refinance will greatly lengthen the loan’s terms – If you’ve only got 10 years left on your mortgage and you want to refinance to stretch out those payments over 30 years, you won’t come out ahead. Any money you save on lower payments will be lost in the cost of the refinance and the extra 20 years of interest you’ll be paying on your mortgage.
- When you don’t plan on living in your home for much longer – The money you save each month might not even come close to the prohibitive price you paid for your refinance.
If you don’t plan on staying in your home for that long, or you can’t afford to wait until then to recoup your losses, refinancing may not be a good idea.
Have you refinanced? What drove your decision? Let us know on Facebook or Twitter!