There are many reasons why people decide to refinance their homes, from a lower interest rate to paying off the home sooner to getting their finances back on track.
Whatever the reason might be, you’re likely wondering one question: Is a refinance right for your mortgage?
After all, everyone has different wants and needs, not to mention mortgages.
So, the first thing we will say is… It depends on how your mortgage is set up. Some people have the possibility to refinance their home and lower their interest rate, saving them money in the long term. For others, it might not work out that smoothly.
There are situations in which refinancing a home is a bad decision. For example, refinancing might not be in your best interest if you want to consolidate debt, if you want to move into a longer-term loan, or if you’re trying to save money for a new home.
While many people go the refinancing route to save money, it’s important to note that there are costs of refinancing home loan. Some of those costs could include the application fee, valuation fee, discharge fee, break fee, settlement fee, mortgage registration fee, and the exit fee. Not to mention, you’re also using your time and effort to lock down this new rate. Your time is priceless, as everyone has the same amount of hours in the day and we can’t buy more time.
All of those fees can add up to thousands of dollars, but, of course, it depends on your situation and your loan provider.
With all of that said, we want to stress that everyone’s financial situation is different. Many people refinance their home to have more cash on hand or to save money on their monthly payments, which gives them more money on a monthly basis.
It’s typically not a good idea to refinance a home just to use the saved money to purchase other materialistic items, but the choice is yours.
If your home has increased in value, then you could do a cash-out refinance, which, according to NerdWallet, “replaces your existing mortgage with a new home loan for more than you owe on your house.”
You receive the difference in cash and can use the money however you want, from debt consolidation to home improvements. If this is a possibility for you, then it could lead to you receiving a large amount of money in a short period of time.
On another note, if your credit score has improved, then refinancing your home could be beneficial as a higher credit score typically means a lower interest rate.
While we’ve mostly talked about saving money with a possible lower interest rate, some homeowners refinance their homes so they can pay off their loans sooner. For example, they refinance a 30-year loan into a 15-year loan. This allows a homeowner to pay off a home faster while paying less interest over the life of the loan.
If you can get a better interest rate, your credit score has improved, or other factors, then it might be time to refinance your mortgage.
If you’re considering refinancing your home, we encourage you to use a refinancing calculator to see what you can expect. It’s also smart to speak with your loan provider to view your options and see what your benefits are.
Above all else, everyone has different options and situations. Your reason to refinance your home might not be a good reason for other homeowners, and vice versa. As long as you’re aware of what a refinance means to you, including the disadvantages (not just the advantages), then you will be able to make an educated decision that benefits you and your mortgage.