When a mortgage is refinanced, the borrower pays off his or her current loan and replaces it with a new one. There are many reasons to refinance a mortgage: the chance to get a lower rate or shorten the term, the wish to move from an adjustable rate to a fixed-rate mortgage, or debt consolidation, to name a few. While these are legitimate reasons, they do have their drawbacks, and it’s crucial for homeowners to answer the question “When is the best time to refinance?” Below are a few good reasons to refinance, along with a few reasons to delay the decision.
Getting a More Favorable Interest Rate
One of the strongest reasons to secure refinancing is to reduce the interest on the current loan. Historically, it’s been considered worthwhile to refinance if it would result in an interest rate reduction of at least two percent. However, today’s lenders say that one percent is acceptable. Reducing interest rates not only helps borrowers save money, it builds equity faster and decreases the monthly payment amount.
Shortening Loan Terms Doesn’t Always Lower Payments
When interest rates drop, borrowers often get the chance to refinance existing mortgages for other loans that, without much of a change in monthly payment, come with shorter terms. For example, on a 30-year fixed-rate $150,000 loan, refinancing from nine percent to five and one-half percent would cut the loan term almost in half, with just a slight decline in the monthly payment amount.
Moving Between Adjustable and Fixed-Rate Loans
While an adjustable rate mortgage may start out with a lower rate than a fixed-rate loan, occasional adjustments may bring rate increases higher than rates available through fixed-rate mortgages. When these adjustments occur, moving to a fixed-rate loan brings lower rates and eliminates worries over interest rate increases. On the other hand, moving from a fixed rate to an adjustable rate mortgage is a sound strategy when interest rates are declining. Here, those periodic adjustments would bring declining rates and lower monthly payments.
Debt Consolidation and Equity Use
While the above reasons are all sound answers to the question of Mortgage refinancing rates: when is it worth it?, refinancing may be the start of a never-ending cycle of debt. It’s important to consider this when considering mortgage refinancing for the purposes of debt consolidation or home equity usage. Many homeowners access their home equity to cover expenses such as college tuition or home remodeling but increasing the loan term is rarely a solid decision. Others refinance to consolidate debt, and while it seems like a good idea on the surface, it doesn’t address the issues that cause people to go into debt in the first place.
Refinancing a home loan is a great move if it brings a lower monthly payment, shortens the loan term, or helps build equity faster. When used wisely, it’s also an effective way to manage debt, but when it’s used carelessly, it allows the cycle of debt to continue. With careful consideration, a mortgage refinance can help homeowners achieve their financial goals without driving themselves deeper into debt. Visit our website to learn more tips on when should you refinance a home loan.