Refinancing your mortgage might be the most financially sound decision you could make in your life. If you have the power to negotiate more favorable mortgage terms, why not just go ahead?
The decision to refinance your mortgage comes with several serious implications. Your monthly payments and the life of your mortgage will change. The type of mortgage you have can be changed as well.
Let’s look into the best reasons to refinance your mortgage.
Reasons To Refinance Your Mortgage
Secure A Lower Interest Rate
One of the most common reasons to try to negotiate a new mortgage is to secure a better interest rate. A good rule to follow is that if you can reduce your interest rate by at least 1%, it’s a good idea to do so. The money you’ll save is enough of an incentive on its own.
Landing a lower interest rate will help you build equity in your home faster. With a fixed-rate mortgage, your earlier payments go towards paying off your interest more than paying the mortgage’s balance. So, with a lower interest rate, you can gain equity faster. This gives you more leverage to tap into your home’s equity for financing if you hit a financial rough patch.
Lengthen Your Term For Manageable Payments
By taking a new loan to cover your mortgage, you can buy yourself more time to repay. A longer-term with a refinanced mortgage almost always implies lower monthly payments. So, if your current repayment schedule is a burden you’d rather shake off, refinancing your mortgage can help.
Shorten Your Term
If interest rates have fallen enough, you can likely refinance to a shorter-term fixed-rate mortgage without much higher monthly payments.
If you want to get your mortgage off your back, you can in some cases shorten its term. This isn’t the most popular course of action though. Most people choose to lengthen their term, as a refinanced mortgage is another loan to pay for the first mortgage you took.
Change Your Mortgage Type
Converting your mortgage type can be advantageous in a few situations.
If you have an adjustable-rate mortgage, it’s likely your rates started off lower than fixed-rate mortgage rates. However, periodic adjustments often lead to rates that are higher than those of fixed-rate mortgages. In this case, taking a new fixed-rate mortgage will:
- Lower your interest rates right away
- Avoid more interest rate hikes in the future
If you currently have a fixed-rate mortgage and interest rates are falling, you could do the reverse. Converting to an adjustable-rate mortgage may result in a lower interest rate for at least the first few years following your refinancing.
Tapping Into Your Property’s Equity
A more open-ended reason to refinance your mortgage would be to use your equity to cover other large expenses.
This course of action should be taken with caution and sound financial logic. The decisions in the scenarios discussed above are all sound because they result in lower spending. But tapping into your equity for other expenses will have you incur a potentially risky form of debt that may start a slippery slope into financial turmoil.
You can use the equity in your home to pay for expenses like a new car or a family member’s tuition. But keep in mind that these decisions don’t have any benefit to your home itself.
Tapping into your equity to remodel your home can be a wise choice. Many people choose to remodel their homes using their equity with the justification that doing so adds value to their home at a much smaller cost than another type of loan would come with. This is a sound decision, as home equity financing is secured by the value of your home. That means interest rates are lower than other loans you could take to pay for remodeling.
Another reason many people refinance their mortgage is debt consolidation. You can refinance your mortgage and tap into your equity to pay off all your other debts. While this does reduce the cost of your interest payments overall, it’s not always a wise choice. But if you have a sound financial plan going forward and can spend responsibly to avoid more debt, it’s a sound financial choice.
Should I Refinance My Mortgage?
It’s always best to choose the course of action that is financially sound. If refinancing your mortgage results in lower expenses for you, it’s worth doing. When it comes to paying for expenses unrelated to your property, we’d recommend caution. It’s not always best to sacrifice equity for overall lower interest expenses.
Unsure which choice is more financially sound for you right now? You can always reach out for advice from professionals. Many home finance professionals offer resources that you can use to calculate how much refinancing your home will save you.
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