Is Refinancing Your Mortgage A Good Idea?
While I take the weekend to see some of my friends and watch my favorite NBA team and player, the Milwaukee Bucks and Jabari Parker, I bring to you a post to read if you are thinking about refinancing, brought to you by Derek Fisher. Hope everyone has a great weekend!
What with interest rates holding at low levels for many months and the employment and credit availability pictures looking better and better, it is not surprising that many people are considering refinancing their mortgages. Deciding whether doing so is a good idea or not requires that you consider a number of factors.
Refinancing might be a good move if:
It allows you to lower your monthly payments – If you purchased your home at a time when interest rates were significantly higher, you may be able to significantly reduce your monthly payments by financing at a lower, fixed rate. You may have the same effect by switching from a variable-rate mortgage to one that is at a significantly lower fixed rate.
You can pay your mortgage off in a shorter length of time – Your monthly payments for a 15-year mortgage at a lower rate might be only minimally higher than the payments on a 30-year mortgage taken out when rates were higher, especially if you have some equity in the house due to appreciation. Given the dramatic increase in home prices over the last few years, this will quite likely be the case. At any rate, you will build equity in your home more rapidly by diminishing the principle at an accelerated pace over a 30-year mortgage. Not only will you pay the loan off more quickly, you could actually save more in interest payments than the initial purchase price of the house. Those savings, if invested wisely, could considerably increase the size of your savings.
You refinance with a cash-out provision – Refinancing with a cash payment to you can be quite beneficial, if done for the right reasons, such as paying off high interest rate credit cards, or applying upgrades to your home that actually increase its value and by extension, your equity.
Refinancing enhances your credit score – While banks are still somewhat hesitant to offer unsecured loans to any but the most credit-worthy borrowers, they are increasingly open to offering loans that are secured by real property, especially to borrowers who have an acceptable, if not stellar, credit history. Being accepted for a new mortgage can serve to increase your credit score, which can open the door to more readily available credit elsewhere, and at more favorable terms.
Refinancing might be a mistake if:
The costs of refinancing are greater than the payoff – When refinancing your home, you will be faced with closing costs, on top of the interest you will pay on the loan. As a general rule, if you don’t intend to remain in the home for a couple of years or more, the costs of refinancing might actually be greater than the savings you realize due to lower monthly payments. This could also be the case if we experience another housing bubble burst, such as occurred in 2008. Before deciding whether to refinance, establish a conservative estimate as to how long you will remain in the home. Then calculate closing costs and the total of monthly payments at the lower interest rate over that period of time. Compare the total of these to the total of monthly payments during the same time period under your existing mortgage. Naturally, with all other factors being equal, you would be better served going with whichever option results in the lowest cost.
You don’t have a productive plan for the cash-out payment – Although refinancing your mortgage with a cash-out mortgage can be advantageous for paying off other higher-interest debts, you will need to ensure that the payoff is greater than the costs, as noted above. Take into consideration, also, that when using the cash-out to pay off those higher interest rate debts, you are exchanging a short-term indebtedness for a long-term debt. Furthermore, if you do not have a productive plan, such as paying off other debts or upgrading the home in a way that increases its value beyond the cost of the upgrades, a cash-out mortgage can be a dangerous thing. Many people who had refinanced with a cash-out mortgage and spent the cash on luxuries or poor-return upgrades on their homes prior to the economic crisis found themselves in a negative-equity situation, and far too many actually lost their homes when the crisis affected their employment status and diminished or outright eliminated their income. While it might be tempting to have a significant sum of cash at your disposal, the temptation to use that cash for purchases that do not improve your credit standing or increase the equity in your home can be great, and the ultimate results disastrous.
By being honest with yourself and disciplined in your decision-making, refinancing your mortgage can put you in much better financial shape than you were before refinancing. This is especially true if you expend the effort to find a lender that offers the best possible terms. Thankfully, there are websites such as readies.co.uk that allow you to compare different lenders and the terms they offer.
On the other hand, failing to consider all the factors or yielding to temptation that has been building throughout the last decade’s difficult financial times could put you squarely on the road to further hardship, especially in the very possible event of yet another housing bubble. Choose wisely.
Featured image courtesy of: Mortgage Finance Guide