When Should I Refinance My Mortgage?

If the value of your home has increased, or if interest rates have dropped, you may want to consider refinancing your mortgage loan. There are many good reasons to consider refinancing; however, doing so is not always the best option for every homeowner. We’ll explain what a refinance is, then give some good reasons to consider refinancing your mortgage:

What is Mortgage Refinancing?

Refinancing is the process of getting a new loan to pay off an existing mortgage. There are many good reasons to consider refinancing, but it’s important to review your current financial situation and fully understand your options as a homeowner.

The following information explores some of the different reasons why you should consider refinancing your mortgage:

When Should I Refinance?

Refinance to lower your mortgage payment – Have interest rates decreased since you bought your home? While rates typically do not go up and down by much, even a slight percentage change can save you hundreds of dollars over the life of the loan. If your income has decreased, or you are living on retirement income, refinancing may allow you to continue living in your home with a lower payment.

Refinance to change your home loan type – If you have an adjustable-rate mortgage (ARM), a balloon loan, or if your loan payment includes Private Mortgage Insurance (PMI), you may want to consider refinancing to a fixed-rate mortgage.

An ARM is a home loan in which the interest rate adjusts periodically based on market conditions. A balloon loan is a type of loan that has monthly payments that aren’t large enough to fully pay off the principal balance by the end of the mortgage term. A final “balloon” payment is necessary to pay the remaining balance, and this amount can often be larger than the monthly payment. In comparison, the interest rate and amount of your monthly mortgage payment on a fixed-rate mortgage stay the same throughout the life of the loan, making budgeting easier.

Refinance to shorten the term of your mortgage loan – Another reason to refinance your mortgage is to shorten the time you have to pay off the loan. For example, if interest rates have decreased while the value of your home has increased, you may be able to refinance your mortgage to a shorter loan term. By going from a 30-year-fixed loan to a 15-year-fixed loan, you’ll be able to pay off your mortgage loan sooner. Plus, you’ll be able to pay less interest at a lower interest rate.

Refinance to free up cash – The amount of equity in your home is the difference between the property’s value and the amount owed on loans you took out to buy the home. Equity is an asset that belongs to the homeowner. You can borrow against your home equity through a loan or a line of credit. Doing so can free up funds to use for a variety of needs, such as debt consolidation, home remodeling projects, and/or major purchases.

Life Events that May Require a Refinance

There are many life events that can cause your financial situation to change, such as a change in income, a family death, or the birth of a child. When financial changes happen, you should discuss ways to restructure your debts with a financial adviser. Some common financial changes that may require refinancing include:

Removing a Co-Signer – If someone co-signed on your loan when you bought your home to help you qualify, you will probably need to refinance to remove them from the loan. To release them from their obligation of liability (for instance, if they are looking to purchase their own home), a refinance will remove this co-signer from your loan.

Buying out a Co-borrower or Spouse – If you were married when you bought your home but have decided to divorce, a refinance is required if the house is awarded to one of the partners by the divorce decree. This refinance will remove the non-interested party from the loan and the title. If your divorce decree requires you to buy-out your former partner’s interest in the property for a determined amount, you can refinance to remove them from the mortgage loan and pay to buy-out their interest.

Mortgage Refinancing Considerations

Before making the decision to refinance, consider these factors:

  • You may need to stay in your home for a certain number of years to reap the greatest potential savings of refinancing.
  • Your current mortgage terms might include a prepayment. Read your mortgage documents carefully.
  • Your income tax could be affected by a mortgage. Consult your tax adviser about any possible tax implications.
  • You could be responsible for paying certain fees associated with refinancing your mortgage. These fees might include, but are not limited to, application, recording, title, mortgage tax settlement, tax services, and processing fees.

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