Refinancing your mortgage might sound like a risky proposition. Since refinancing costs can equal as much as 5 percent of your loan’s principal, it’s not for everyone. There are, however, some situations where it can be useful.
Lower Interest Rates
One of the best reasons to refinance your mortgage is to see a reduction in your interest rates. Although many experts say not to do it if the rate decrease will be less than two percentage points, others say it can be worth it for just one point. It’ll depend on how big the mortgage is and how long you still have to make payments on it. Lower rates can also mean putting more equity into your home, which can be helpful in the long run.
Shorter Loan Terms
If you see your interest drop low enough, then you can actually cut the term of your loan in half in some cases. This is a good idea if you have a fairly high-interest rate before refinancing. For example, if a 10% interest rate on a 30-year mortgage is cut to 5%, it means that you can change your loan to a 15-year term with a very small increase in your monthly payments. If the interest rate doesn’t go down too far, however, then cutting the term can see significantly higher payments. Do the math before making the decision.
You Can Switch to an Adjustable Rate
If interest rates in your area have gone down far below your fixed-rate, then refinancing your mortgage can give you the opportunity to change to an adjustable-rate loan. This can mean significantly lower payments for a few years, but it can also mean higher payments if interest rates go back up. Many experts advise that you should only switch to an adjustable-rate mortgage if you’re either planning to relocate within the next five years or if you only have a short time remaining on your payment schedule.
You Can Switch to a Fixed Rate
Conversely, many who refinance will do so to switch to a fixed-rate mortgage. This strategy is a good one if your adjusted rate has risen to a level that makes it harder for you to make your monthly payments. When this happens, fixed rates will usually be lower than the adjusted rates, and you won’t have to worry about rate hikes in the future. If you plan to stay in your home for a long time, this is a solution to consider.
Debt Consolidation
This is a good option in some situations, but it’s not an option for everyone. Many people who generate large amounts of high-interest debt on things like cars, credit cards, and housing will often go back to these bad habits once they’re able to do so and sometimes looking for a cash buyer to get out of your property is the best idea. Another thing to consider in some situations is that that refinancing your mortgage could lead to eventual bankruptcy if you remain a spendthrift. You should only consider the consolidation of debt if you’re usually financially prudent and have accrued debt due to external pressures from something like job loss. If you’re fiscally responsible, then replacing high-interest debt with low-interest payments can be a big help as you rebuild your credit and your finances.
