There are a lot of reasons you may want to refinance your mortgage: the chance to secure a lower interest rate, shortening the amortization, changing from an adjustable or variable rate mortgage to a fixed rate or vice versa, and more.
No matter what your motivation is to refinance your mortgage, you have to weigh the costs and benefits of doing so before you sign on the dotted line.
Let’s explore some of the reasons you may, or may not, want to refinance your mortgage.
Securing a Lower Interest Rate
One of best reasons to refinance your existing mortgage is to lower the amount of interest you’re paying. This is what we do for a large portion of the clients we work with.
If you have a second mortgage on your home from an alternative or private lender, chances are you are paying anywhere from 8% to 15% in interest, but that number can also be much higher.
Typically, these kinds of loans are meant to be short term solutions and refinancing your second mortgage into a new first mortgage when its term comes up for renewal is usually better than just continuing to pay the high interest payments.
The same can be said about your first mortgage as well, the rule of thumb being that if you can save at least 2% on your interest rate, refinancing may be a good option.
Shortening the Amortization
Simply put, when you have the opportunity to refinance your mortgage at a lower interest rate, you can reduce the amortization of the mortgage (so instead of 30 years it could be shortened to 20 years) and your monthly payment would stay relatively the same.
This means you could pay off your mortgage years earlier without drastically changing your monthly cash flow situation and save yourself from paying a considerable amount of interest at the same time.
Converting Between Adjustable Rate and Fixed Rate Mortgages
If interest rates are on the rise like they seem to be at the moment, converting your Fixed rate mortgage from an Adjustable or Variable rate mortgage can result in a lower interest rate overall and eliminates the concern and stress of future rate hikes.
On the other hand, if interest rates are falling, switching to an Adjustable or Variable rate mortgage can allow you to take advantage of the lower rates, eliminating the need to refinance your Fixed rate mortgage every time the term comes up.
Read more: Paying Off Debt With Mortgage Refinancing
The answer to whether or not it makes sense to switch between Variable and Fixed rates depends on where you think interest rates are going in the future. Working with a mortgage professional who can help you figure out the best move is a good idea.
Accessing Equity and Consolidating Debt
Refinancing your mortgage to access your equity and consolidate debt is a powerful, yet dangerous, tool.
Taking your high interest debt and moving it to the low interest rates of your mortgage can save you potentially hundreds of dollars a month, which is great, but it can also create an opportunity to go even deeper into debt if you’re not careful.
Before you tap into the equity of your home, you have to be sure that you won’t just fall back into the bad habits that got you in trouble in the first place. Racking up more credit card debt after refinancing is all too common.
But if you can resist that temptation, consolidating your debt into your mortgage can put you back on the path to financial freedom instead of the endless hamster wheel of high interest debt.
The trick is to use the tool properly.
Using your equity to fund a home renovation is another popular reason to refinance your mortgage, but if that’s your plan make sure you are adding value to your home and not just spending money on something cosmetic.
Refinancing can make a lot of financial sense if it reduces your mortgage payment, helps you pay off your mortgage sooner, or allows you to considerably reduce the overall amount of interest you’re paying on your debt.
When used correctly, refinancing your mortgage can help you get your finances under control and put you into a much better situation.
But you have to really crunch the numbers and calculate the costs associated with the refinance and the benefits you’ll get from it. That’s why it pays to have a knowledgeable mortgage professional walk you through the process and fighting on your behalf to make sure you get the best deal possible.
Continue Reading: 6 Mortgage Refinance Tips To Save You Money