When you refinance the mortgage on your home, you payoff the existing mortgage and replace it with a new one. There are many benefits to you for refinancing, in most cases this can be a money-saving move but not in all cases. Sometimes the expense of refinancing will negate the advantages of a lower interest rate. In all cases G.A. Farrell & Associates advises that you review your specific long-term goal, in detail, with a professional financial advisor before committing time and energy into refinancing your mortgage.
Refinancing does come with out-of-pocket costs, some of which will be very similar to those you experienced with your original mortgage, even though the property you are using is the same. These costs need to be taken into consideration and, on average you should recover these costs, over only a few years, from whatever saving your refinance has created for you.
Some mortgages come with a penalty for breaking the original payment terms and you must take this into consideration when evaluating any benefits gained from refinancing.
How long you plan to stay in your home is also a crucial factor in evaluating refinancing options. Most mortgage refinancing is a long term financial commitment. If you plan to move within the next five years, it just might not be worth the hassle to go through refinance planning.
Refinancing, in many cases increases the overall life of your loan. This increase will mean more payments and these additional disbursements can negate any overall monthly savings. Remember to calculate this into your financial review when analyzing the pros and cons for refinancing.
Now let’s discuss some of the major reasons to consider refinancing your home: –
Securing a Lower Interest Rate
Lowing your interest rate, by at least 2%, is a major benefit for refinancing your mortgage. A lower interest rate mortgage will decrease you monthly payments (though not always necessarily) and the cash you save can now be put to other uses.
Lowering your Monthly Payment
Refinancing your mortgage to extend its terms, even at the same interest rate, may result in a smaller monthly payment. If you are far enough into your existing mortgage period, on average ten to fifteen years, on say a thirty-year term mortgage, you may be able to refinance the terms back out to the original thirty years, thereby reducing your monthly payments.
Reducing the Life of your Mortgage
At a lower interest rate, plus your ability to retain your existing monthly payment, you can effectively reduce the length of your mortgage.
You may have more than one loan on which you are making monthly payments. On top of your mortgage, you may have a car loan plus another loan you took out for making additions to your home. Consolidating all these loans into one mortgage could reduce your overall total monthly payment.
Using Built-Up Equity
Over the years (at least ten to fifteen) of mortgage payments, you have built up equity (meaning your debt to capital ratio has reduced) in your home. This increased equity can allow you to refinance, extending your terms back out to the original period, usually resulting in payments at around the same monthly rate, but with a large cash payout. Great for paying for a needed home remodeling or for a child’s education.
The Bottom Line
Refinancing can be a benefit if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. It can also be a valuable tool in getting debt under control. Before you refinance G.A. Farrell & Associates urges you and your financial advisor to be sure to take a careful and detailed look into your financial situation.
Keep in mind that refinancing comes with out-of-pocket costs. It takes years to recoup that cost from the savings gained from refinancing. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings. It also pays to remember that you should always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn’t help you achieve any of those goals.
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