Navigating Mortgage Refinancing: Is it the Right Choice for You?

Millions of homeowners refinance their mortgages every year. There are several good reasons why you may want to refinance, but there are also some downsides to refinancing, especially if you’re doing it for the wrong reasons.

Is refinancing the right choice for you? Read on to decide.

Benefits of Refinancing

In certain situations, refinancing makes perfect sense and can even save homeowners money.

Refinancing can:

  • Decrease your mortgage rate. Even a point or two lower rates can equate to thousands of dollars saved over the life of the loan.
  • Decrease your monthly mortgage payment. If large monthly payments are taxing your budget, refinancing could reduce the strain.
  • Cut the length of your mortgage. Pay your loan off faster.
  • Get you out from under private mortgage insurance (PMI). Once you owe less than 80% of the home’s value, refinancing to remove PMI can save money every month.
  • Free up equity to use for other expenses.

Drawbacks of Refinancing

It’s not always the best decision to refinance your home’s mortgage. Some of the cons of refinancing are:

  • It can stretch out getting your loan paid off – and delaying payoff is seldom a smart move.
  • There are fees rolled into refinancing. Steep fees can make refinancing not worth it.
  • You may have costly prepayment penalties. Check your current mortgage to ensure you wouldn’t owe fees.

Types of Mortgage Refinancing

There are several types of mortgage refinancing, like:

  • Refinance from one conventional loan to another.
  • Cash-out refi. The refinanced amount would be more than you owe on your mortgage. Then, you would receive the difference in cash.
  • FHA and VA refinance. These options are for FHA and VA loans.

When It Makes Sense to Refinance

If you’re thinking about refinancing, talk to a reputable mortgage company and let a representative explain your options. Refinancing may be a smart financial move if:

  • Market interest rates are lower than your current mortgage rate.
  • Refinancing could help you get your loan paid off faster.
  • You need to secure a lower monthly mortgage payment.
  • Your credit score has increased, and you would qualify for better loan terms.
  • Tapping into your home’s equity would help you pay for important expenditures like home repairs or renovations, or education expenses.

What Should Homeowners Consider Before They Refinance?

Think about these things to help decide if you should refinance your mortgage loan:

  • How long am I going to stay in the house? If you’re going to move soon, refinancing may not be worth it.
  • Will it save me money? Run the numbers to see if and how much refinancing would save you in the long run.
  • Can I switch to a shorter loan term? If you can chop your 30-year mortgage to a 15- or 20-year note, refinancing may be smart.
  • Do I need to tap into my equity? Your home’s equity is a smart way to pay for important expenses without going into credit card debt.