With falling interest rates and a hot housing market, many people are wondering if this is the time to refinance their home mortgage.
There are several factors to consider when asking yourself “should I refinance my home?”
Even with lower interest rates, it might not always be the best financial decision. Consider the following factors before making the move to refinance your home mortgage.
Answering the Question “Why Should I Refinance My Home”?
Sometimes the reasons that people want to refinance may not be fiscally advantageous in the long run.
If the money gained from a refinance cuases you to make payments on your loan for a longer amount of time, refinancing may not be the best option.
For example, if you are considering leveraging the equity in your home to consolidate debt, this could increase the number of years you will be paying on your mortgage.
However, some use lower interest rates to shorten the loan term, for example turning a 30-year loan to 15-years loan without changing the monthly payments. That can save you a lot of money in the long run.
How Long Are Your Planning to Live in Your Home?
Refinancing a home involves closing costs and if you are planning to move within the next three years, you may not have time to recoup those costs.
You can calculate the time to recoup your costs by diving the amount of the closing costs by the monthly amount saved by the refinance.
If you plan on selling your home before the break-even point of recouping, it isn’t worth it to refinance. However, if you are in it for the long-haul, a lower interest rate could save you thousands over the life of the mortgage.
What is Your Credit Score?
If your credit score is lower now than it was when you bought your home, you may want to focus on raising it before looking into refinancing your home.
Even a swing as little as 50 points in your credit score can cost you thousands of dollars over the life of your mortgage. On the flip side, if you’ve been working hard to raise that score, it might be the perfect time to refinance.
Private Mortgage Insurance (PMI)
If you are carrying a PMI payment, a refinance to remove it could save you a lot of money. If you have at least 20% equity in your home and currently pay PMI, look into a refinancing as an option to remove it.
And when you are ready to start the refinancing process, consider doing so with a notary. Find more information here about how to refinance a home with a notary.
Playing it Smart
While taking advantage of lower interest rates may be tempting, there are a lot of factors to consider when asking yourself “should I refinance my home?”
Weighing the pros and cons, and talking to a mortgage professional, can help ensure you make the best fiscal decision.
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