Does a mortgage refinance make sense? The answer to this question highly depends on your goals for a new mortgage and how long you intend to stay in the property.
What does it mean to refinance a mortgage?
Mortgage refinance means paying off an existing loan and replacing it with a new one. We can count a good number of reasons why a homeowner may decide to refinance: either to shorten the term of their mortgage, to lower interest rates, to tap into home equity and raise funds to deal with a financial emergency, finance a large purchase, consolidate debt, or to convert from an adjustable to a fixed-rate mortgage, or vice versa.
How to Determine when it Makes Sense to Refinance
There are some situations when refinancing your mortgage definitely makes sense. Let’s get over a bit of math to help you determine such opportunities.
- Your Break-Even Point: One tool to help evaluate refinancing is the break-even point. An important factor to look out for when refinancing a mortgage is the duration needed to recover your closing costs. This usually depends on how long you decide to stay in the home and just how much you can save. For example, if a mortgage refinances would save you $150 per month on mortgage payment and your refinance closing costs are $3,600, an average of two years will be needed to recover the costs. If you intend to stay in the same property for the next five years, refinancing would be a great idea.
- Converting from an ARM and a Fixed-Rate Mortgage: Another moment that would make perfect sense when it comes to refinancing it when switching between an adjustable-rate mortgage and a fixed-rate mortgage. ARMs are known to end up with higher interest rates than fixed-rates. Even if you find an ARM lower at the start, these low rates can lead to borrowers getting caught up by surprise later when their monthly payments go up along their mortgage rates. Refinancing an ARM to a fixed 15- or 30-year mortgage program would eliminate any uncertainty surrounding future changing rates. This switch would be a perfect option when rates are low.
- A Shorter Mortgage Term: When interest rates are down, homeowners are allowed to refinance an existing loan for a new one and without much change in the monthly payment with a significantly shorter term. For a 30-year fixed-rate loan on a $100,000 home, refinancing from 9% to 5.5% would cut the term in half to a 15-years with just a slight change in the monthly payment from $804.62 to $817.08. however, if you already found yourself at 5.5% for 30-years ($568), going for a 3.5% mortgage would bring your monthly payment to $715. Just dot the math and see what works best for you.
- Get Better Rates: Mortgage rates are known to constantly fluctuate and the rate you get would depend on a good number of factors including; credit score, economy, and the property you own. If you qualify for better rates today that what you could get when you bought your house, refinancing would be of great help to save money.
Refinancing would serve a great purpose if shortens the term of loan, reduces your mortgage payments, or helps in building equity much faster. When carefully taken into consideration, it can be used to bring debt under control. Before deciding to refinance, take a good look at your financial situation and ask yourself the following questions; how long do I plan to live in the house? How much money would I save from refinancing? You can go further with your decision when you get reasonable answers to these questions.