Sometimes people assume that it is time to refinance their home when interest rates seem to be on the downtrend. However, refinancing should only be done in certain situations, and this differs for every different person and home. Sometimes it makes sense to refinance. Sometimes it does not. Refinancing can be a large feat, and should only be done if the time calls for it. This often depends on the person’s financial goals are. For instance, someone may want to lower interest rate and/or monthly payment, but before doing this, they should ask themselves some basic questions.
First, the person should know how long they expect to be in their home. This could mean the difference between saving money, and costing money. Second, someone should think about how much equity they have in their home. If there is enough equity in the home, it might be worth it to refinance. Also, if there is already a mortgage on the home, the homeowner should think about if they are willing to pay the points to get a lower rate. It does save money to get a refinance, but it also costs money to stop the original mortgage. Finally, the potential borrower needs to consider whether the lower monthly costs will even begin to cover the closing costs of the refinance, and other fees.
Another question that people ask in refinancing is whether or not they should switch from an adjustable rate mortgage to a fixed rate mortgage. Generally, it is a good idea to get the lowest fixed rate possible in a refinance, but the borrower also has to consider their personal situation. If they are still in the beginning stages of an adjustable rate mortgage, and the person plans on moving in the next several years, it might not make sense to refinance. This is because the first couple of years of an adjustable rate mortgage are fixed at the lowest interest rate, and so refinancing will not get them an even lower interest rate, not to mention that the costs of going through the refinance might not save any money.
However, if the rate on an ARM is about to adjust and the person thinks the mortgage rate will go up, then it may make sense to get a long-term fixed-rate mortgage, especially if they people don't plan on moving in the next seven years or so. When there is potential to have to pay more interest on an ARM, many people would rather sit it out and wait for better options with their home.
Some people make the mistake and tend to believe that a cash-out refinance will have more expensive interest rates. The interest rate paid on a cash-out refinance loan will generally be the same as what is paid on a mortgage where the person doesn’t take cash out. There may be an incremental fee associated with a cash-out refinance loan depending on the specific loan they choose and the loan-to-value ratio. Using the equity in the home to pay off other bills can be a smart thing. Consider taking some money out to pay off high-interest credit homeds bills, home loans and any other debts that have non-tax-deductible interest.
