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Does it Make Sense to Refinance My Mortgage?

By Bill Gassett | July 19, 2021

If you are asking yourself, “should I refinance?” there are many things to consider. Homes are normally the largest expense people ever commit to and one that can have far-reaching consequences on their financial future.

Looking at refinance mortgage options should provide you a way to deal with unexpected expenses, better plan your retirement, or pay for improvements to your home. Whatever your reason for mortgage refinancing, we look closer at the options.

Let's take a look at some of the most common reasons why people will refinance their home mortgage.

Reasons For Refinancing a Home Mortgage

How Mortgage Refinancing Can Help You

If you refinance your mortgage, you can reduce your monthly outgoings, change the loan terms, or use the equity you have to provide money when you need it. This can help you reach your financial goals sooner than you might have thought possible.

Everyone has different reasons for wanting to refinance a mortgage. Maybe one of these is exactly the situation you fall into?

Changing the Loan Term

Changing the amount of time your mortgage runs can help in a couple of different ways. Refinancing with a shorter mortgage could mean switching from 30 years to 15. If you can pay more each month, you will avoid much of the interest you would have otherwise paid. Many folks will go with a no closing cost refinance, so they don't have to take any cash out of their pocket.

You can also lengthen the mortgage term if you need to. If you are finding it difficult managing your monthly outgoings, refinancing over longer-term should mean lower payments each month, though you might end up paying more interest overall.

Dealing with Debt

If you have been paying your mortgage for a while, you should have some equity in the home. Typically, if your mortgage is more than 5-years old, you should have a fair amount of equity.

If your home has risen in value since you purchased it, this will also add to the equity you have. If the fair market value of your home has increased, it will have increased the difference between what you still owe and the value.

If you have some debt that you need to clear, you can use this equity to consolidate at a lower interest rate. The cash-out refinance mortgage option allows you to increase your home loan using some of your equity.

Getting mortgage approval is usually fairly easy, especially when going through the same mortgage company that currently holds your loan.

Moving From an Adjustable-Rate to a Fixed-Rate Mortgage

When you first take out an adjustable-rate mortgage (ARM), you probably did it because of the attractive low-interest rate. But after a certain period, perhaps 5 or 10-years, the interest rate might be allowed to fluctuate.

This can sometimes lead to lower interest rates, but it will frequently mean that you pay more each month when the interest rate rises. Refinancing your ARM to a fixed-rate mortgage can remove a lot of this uncertainty.

You can also do the opposite, refinancing your mortgage to an ARM. While this does involve more risk, you could take advantage of falling interest rates.

Paying for Home Improvements

If you want to renovate or complete some home improvements, you can use refinancing to pay for them. This could make a lot of sense as cash-out refinancing normally offers lower interest rates than credit cards or personal loans.

Your mortgage rate could be below 4%, whereas you could be paying 12% or more with a credit card. And since you will be putting the money towards improving your property, you will also be increasing the value.

Investing in your property with upgrades or adding new rooms can increase the curb appeal and how much the home is worth. When you come to sell your home, this should make finding a buyer easier as well as providing a better return on your investment.

Having your house closing go smoothly is always a good thing.

Investing for Your Retirement

If you have equity in your home, you could use this to invest and increase how much you have for your retirement. It is never too early to start investing for your retirement. Thanks to compounding interest, the earlier you start, the more your investments will accumulate interest.

If you have equity in your home but haven't reached your retirement contribution limits that year, you could refinance to max out your investment. Right now, money is extremely cheap to borrow. If you think you can make more money in the stock market, then why not?

If you can get a mortgage for somewhere between 3-4% but can put money in the stock market and make 10-20 percent, that is a no-brainer, right? If more people had the foresight to do this over the last few years, they would have made a ton of money!

So, Should I Refinance?

If you want to reduce your interest payments, pay off your mortgage sooner, or have funds available for any reason, refinancing can be the answer.

There are costs involved when you refinance, so you should check a mortgage calculator as an early step to make sure it makes sense. You might see that with just a small difference in the interest rate, you'll be saving thousands of dollars on your home loan.

There are a few other reasons you might want to consider refinancing as well. Check them out and see if any of them match your current circumstances.

Hopefully, you have found the information on why you may want to refinance your mortgage to be useful.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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