Should I Refinance My Mortgage?

Blog Post01/22/2017
Debt Management

There are three reasons why you might want to refinance a mortgage, each with its own benefits and potential drawbacks. If you’re wondering whether it’s the right decision for you, consider the pros and cons carefully, and keep in mind that generally you can refinance 90 to 95 percent of the home’s value with most mortgages.

1. Refinance to Lower Your Interest Rate

Refinancing to a fixed rate mortgage can be a good idea when interest rates are low. The benefit is that if interest rates go up, you’ll be locked in at the lower rate. On the other hand, if interest rates go down even more, you’ll still be locked in and won’t be able to take advantage of the additional decrease.

There are two things to keep in mind before refinancing to a fixed rate. First, the interest rates of fixed-rate loans are generally higher than adjustable-rate loans. Second, the closing costs that come with refinancing may be more than what you’d save with the lower interest rate.

2. Refinance to Decrease Your Monthly Payments

If you have concerns about making your mortgage payment each month, refinancing may be an option. You can lower your monthly payment by refinancing to take advantage of lower interest rates or by extending your mortgage term.

Again, closing costs may come into play because they’re added to your mortgage amount, reducing your monthly savings. When it comes to extending your mortgage term, keep in mind that — though you’re benefitting from reduced monthly payments — you’ll carry the debt for a few more years and you’ll pay more in interest.

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3. Refinance for the Cash

A refinance loan can often result in getting a lump sum payment of cash, particularly if you’ve been paying a mortgage for a long time or if your home’s value has increased since you bought it. Your new mortgage pays off your current mortgage and the difference is deposited into your bank account. This can be beneficial, for example, if you have high-interest debts that you need to pay off. Keep in mind that if you’re refinancing for cash, the limit is usually reduced to 75 to 80 percent of the home’s value.

An alternative to refinancing for cash is to apply for a second mortgage or a home equity line of credit. Both of these options leave your first mortgage unchanged while allowing you access to the cash you need. These may be better ideas if your current mortgage has a lower interest rate than today’s rates.

Regardless of which option you choose, remember that the funds you get from refinancing aren’t free cash. The money you receive is removed from the value of your home, minus the cost of the extra interest you’ll be paying.

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