We’ve all heard it; mortgage interest rates are historically low. But what does that mean for you? Well, if you’re at a point in your life where you’re thinking about home ownership then now is a great time to buy. But what if you already own a home? Don’t feel left out! You can also take advantage of low interest rates by refinancing your mortgage. According to the Mortgage Bankers Association, the average American refinances his or her mortgage every four years. Deciding to refinance your home can be extremely beneficial especially if you bought when interest rates were high or you chose a more creative financing option such as an adjustable rate mortgage. As with any major financial decision there are several factors to consider before you choose to refinance.
Reasons to refinance:
- To reduce monthly payments and overall cost by lowering the interest rate on your mortgage
- To save thousands of dollars in interest by reducing the term or length of your loan.
- To switch your mortgage type from an adjustable rate mortgage (ARM) to a fixed rate mortgage or vice versa.
- Take cash out to renovate your home. A cash-out refinance uses the equity you already have in your home to pay for upgrades or repairs, usually at a lower rate than a home equity line of credit.
- To pay off debt. Use the money you saved by lowering your monthly mortgage payment to pay down debts.
It all sounds so wonderful. It’s a no brainer right? All of these are great reasons to pursue refinancing, but several things should be considered first.
First and foremost refinancing is similar to the process you encountered when you closed on your first mortgage. As you know it’s a process that can be extremely time consuming and stressful, not to mention expensive. It can require an application, credit check, new survey and title search, as well as an appraisal and inspection. It is important to do the math and make sure it will be worth it in the end.
Every situation is different of course, but as a rule of thumb it pays to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. By asking yourself the following questions you may be able to determine if refinancing is worth it:
Questions to consider before deciding to refinance:
- How much can I lower my current monthly payment?
- How long do I plan to stay in the house after I refinance?
- How much will I pay in refinancing costs?
The next thing you need to do is figure out what you still owe on the house, how much you’re paying each month, and how much you initially paid for the house. Itemize all the expenses of the refinance and estimate your new monthly payments. With this, you can figure out where you break even (pay for the cost of the refinancing) and when you begin saving money. Generally, unless you are planning on staying in your home for at least five more years it might not make sense to refinance.
Bankrate.com has a calculator that will help you figure out if you would save by refinancing your mortgage. Click here to see if refinancing is the tight option for you.