Refinancing your home is a tried and true method for homeowners to save money or enjoy financial flexibility. With near historic low interest rates and the possibility of rates starting to increase again soon,1 many financial experts believe that now is the time to refinance. However, it’s important to understand why you should consider refinancing, as it may not be the best option for your particular circumstances. The following details just a few key reasons to refinance your home.
Reduce your interest rate
Right now interest rates are near historic lows. While they’re not likely to skyrocket within the next few years, there’s no guarantee that they’ll stay this low either. If you bought your home during a period where interest rates are higher, now is the time to think about refinancing. Filling out the right paperwork and providing the necessary documentation could save you tens of thousands of dollars over the life of your mortgage.
Reduce your monthly payment
When you refinance a mortgage, you may be able to lower your monthly payment, which would save you interest. Then you have the flexibility to save or invest this money as you wish. Keep in mind that sometimes lowering the monthly payment increases the term of the loan. However, depending on your specific financial situation, this trade off may make sense.
Switch from an adjustable-rate mortgage to a fixed-rate mortgage
If you currently have an adjustable-rate mortgage or are nearing the end of the fixed-rate period of a mortgage, now is an ideal time to refinance into a fixed rate loan. As mentioned previously, interest rates are low currently, but they won’t be this low forever. If you still have a number of years left on your mortgage, locking into a low rate sooner rather than later will protect you from potential interest rate increases in the future. A fixed-rate mortgage also makes budgeting easier because you know exactly how much you’ll have to pay into your mortgage monthly for the life of the loan.
Cash out home equity
Refinancing a home may allow you to cash out your home equity. Depending on the amount of money that you’ve invested in the home and what you’re planning to do with the money, it can be a sound financial decision. You may want to cash out a portion of your home equity to start a small business or purchase an investment property3 or even invest in the home itself. For example, if the home needs a new roof, you can take funds out of the equity to pay for it. Be honest about whether or not you’re making a good investment and if you’ll be able to manage the extra debt successfully.
Before you pull the trigger and refinance your home, take closing costs and other expenses into consideration. Depending on the loan that you select for your refinancing terms, you may be responsible for hundreds or even thousands of dollars in fees. If it will take you several years to pay off your refinancing expenses or you’re planning to sell your home in the near future, most likely it doesn’t make sense to refinance.
Blog content information referenced from the following sources: