Should You Refinance Your Mortgage?
Most people consider refinancing their mortgage as a smart, economic decision as the value of their property increases and refinance rates shift over time. However, while refinancing can be a great way to save considerably over the life of the mortgage, making a decision too quickly, without considering all the pros and cons associated, could lead to you paying more than you thought and take you years to recoup your losses.
You may be asking yourself, “Should I refinance my home loan?” and it’s a good question to ask. There are a few reasons why refinancing your home may not be your best option. Here’s what you may want to consider before pulling the trigger.
When Not to Refinance
1. If You’ve Already Paid Down Most of Your Mortgage
There are many benefits to refinancing your mortgage, and the main reason for doing so may be different for everyone. In many cases, the primary goal of refinancing a home is to secure lower interest rates on the mortgage based on the market’s current rates. However, the value of this decision isn’t always what it appears, especially when a sizable portion of the mortgage has already been paid off.
Deciding on whether or not to refinance your mortgage comes down to balancing both principal and interest. Principal is the amount of money you initially borrowed and have agreed to pay back, while interest refers to the additional fees paid throughout the loan. Although the total principal is not subject to change, the amount of interest decreases as the loan is paid out.
In the early stages of loan payments, these interest amounts are quite large, and it can take time before the principal amount starts to decrease. If you’ve been paying down the mortgage for several years already, it may not be worth refinancing the mortgage, because you will have to reset the balance of principal versus interest and will likely pay more in fees than you were previously paying.
2. If You’re Moving Soon
Choosing if and when to refinance your mortgage is all about timing. The “right” time to refinance shouldn’t only be associated with better mortgage rates and potential savings on your monthly payments. It’s also essential that homeowners make a thorough assessment of their living situation and decide how long they will likely stay in the home after the refinancing takes place.
One mistake homeowners make when refinancing their mortgage is not taking into consideration their break even point after the new loan is issued. Whenever you refinance your home, you’ll be assessed loan origination fees that range anywhere between 3% and 6% of the remaining loan balance. After you refinance and have lower loan payments, it can still take several years before you you’ve paid back these fees in full and see a positive return on the investment. Moving too soon after you’ve refinanced could mean that you’ve taken a loss during the process and would have been better off leaving the loan untouched.
3. If You Will Have a Mortgage Prepayment Penalty
While paying off your home loan is a good thing for the borrower, it is not always the best deal for the lender. Many lenders, especially those who still hold older home loans, may have a prepayment penalty that would impose a fine on you if you tried to pay off your mortgage earlier than its stated terms.
Depending on how much the penalty was for paying it off early, those fines may eat away at the savings you would have enjoyed from a new home loan. This refinancing calculator can help you decide whether a new home loan is right for you.
When Refinancing Is a Good Idea
Of course, refinancing your home can be extremely beneficial in many circumstances, and there are a variety of things to look for that could mean it’s an ideal time to do so.As a rule of thumb, anytime you’re able to reduce your current interest rate by one-half to three-quarters of a percentage, it’s worth, at the very least, looking into refinancing options. If you’ve recently moved into a 30-year loan, these additional percentage points can make a big difference over time and may be worth the effort to reformat.
Depending on how long you’ve been in your home, refinancing your mortgage could be a way to leverage the equity in your home and borrow against it. This is a common strategy for homeowners who want a low-cost way of receiving funding for renovation projects, paying off higher interest credit card debt and other significant expenses.
Choosing the Best Mortgage Refinance Option
Once you’ve decided that refinancing your mortgage is something you want to pursue, the best course of action is to use a mortgage refinance calculator to know exactly how achievable your goal is. Refinance calculators help you to visualize exactly what type of refinancing option will be right for you and help you to compare rates across multiple lenders.
Researching and applying to multiple lenders is often the best way to ensure you get the most competitive refinancing rates. There are many services available online that will help you compare rates across multiple lenders at once. This allows you to choose the refinancing option that’s right for you, giving your better financial freedom and flexibility.