Perhaps you have a home you’re considering refinancing. Great! First, what is refinancing? Refinancing, as it applies to a mortgage, is the paying off a current loan to replace it with a new one. But when is the best time to do so? Here’s a list of three reasons you may want to consider refinancing.
Better Interest Rate
The most beneficial reason to refinance your home is to get a lower interest rate. This helps you in two ways. First, if you’re paying a lower interest rate on the same size loan, your payments will be lower, leaving more money in your pocket each month. Second, over time, you’ll spend a lot less money on interest, too. In other words, there’s a short and a long-term benefit. As a rule of thumb, look for a rate drop of at least 2% to make it worth the hassle and fees associated with a refinance.
Shorter Loan Term
Why would you ever want your mortgage payments to go up? Well, what if an increased loan payment meant you could pay off your home in half the time. If you can afford the higher payment of a 15-year loan versus a 30-year loan, you’ll save a lot of interest and, of course, you’ll own your home outright in half the time.
If your consumer debt is getting harder and harder to manage, and you have equity in your home, a refinance in which you pull some equity out of your home – i.e., end up with some of the loan proceeds in your pocket – may be your answer. When you balance the double-digit interest rates on your credit cards against the single-digit rate on your mortgage, it’s clear there’s money to be saved. The challenge, obviously, is resisting the temptation to run that consumer debt back up after the refinance.