Should I Refinance My Home Loan?
Are the interest rates on your mortgage high? Has your financial situation improved in recent years?
These are some of the main reasons many homeowners choose to refinance their home loan.
If you aren’t familiar with the term, refinancing essentially means that you replace your current mortgage with a new one — preferably with better terms. Your original loan is paid off with the new one. While this might sound like a no-brainer, it might not be a good idea in some cases.
Here are a few reasons that you may or may not want to refinance your home loan.
Why You Should Refinance Your Home Loan
Refinancing your mortgage can be a great idea for a number of reasons.
Here are some of the primary reasons that make refinancing a good idea.
Reduce Your Monthly Payments
This is the main reason that most people choose to refinance.
Why make larger monthly payments than you need to?
In some cases, your interest rates might be higher than current market rates. A general rule of thumb is that refinancing is a great idea if you’ll be able to get interest rates that are at least one percentage point lower than your current rates.
Pay Off Your Mortgage Faster
Another common reason to refinance is to shorten the payment period of your home loan.
This will, of course, increase your monthly payments, so this isn’t an ideal option for everyone.
Soon-to-be retirees, in particular, often make this decision in order to finish paying off their home loan before they retire.
Your Credit Has Improved
If your credit score was less than ideal at the time you received your mortgage, chances are that the terms were not favorable.
If your current interest rates are well above current market rates due to poor credit, it is a great idea to refinance if your credit has significantly improved.
Even if mortgage interest rates are rising, improved credit can still be a great reason to refinance.
Get a Different Mortgage
Lastly, you might refinance to take out a different type of mortgage.
For example, your original home loan may have a variable interest rate. You might have chosen this due to low introductory interest rates. However, if this introductory period is over and your interest rates are starting to increase, refinancing to take out a fixed interest mortgage might be a good idea.
Why You Shouldn’t Refinance Your Home Loan
There are a few primary situations in which you shouldn’t refinance your home loan, including:
- If you plan on moving soon, refinancing isn’t always a good idea as the closing costs to refinance might not be worth it.
- If you are only able to reduce your monthly payments by lengthening the term of your loan, you might want to think again. You’ll end up paying thousands of extra dollars in interest.
- Refinancing to take out home equity, you’ll likely end up with a larger loan balance overall.
Refinancing is often a great idea. However, before you take this step, be sure that your circumstances give you good reason to do so.