should you refinance

Should I Refinance? – Read This First

A very popular question with today’s low rates; Should I refinance?

Perhaps you have seen the advertisements describing the virtues of refinancing your existing mortgage. You know the ones that show happy homeowners securing lower interest rates and lower mortgage payments, while also getting a little extra cash to pay off their credit cards and other debts. It is presented as a godsend, especially if you need some financial relief; but it isn’t the best option for everyone.

Before you call your banker, take some time to determine if refinancing is right for you.

Why are you Refinancing?

There are 5 popular reasons that people refinance their mortgages:

  • Lower Interest Rate
  • Lower Monthly Payment
  • Cash Back
  • Debt Consolidation
  • Mortgage Solution to Avoid Foreclosure

It’s not so much what you plan to do with the loan, but why you are doing it that matters.

If you are financially stable and are simply looking to save money, refinancing could be a great option. However, if you are having serious financial difficulties, refinancing could offer you some relief in the beginning, but could harm you in the long run.

For example, say you get laid off  from your job or suddenly become in need of mortgage help due to some sort of financial hardship. You could refinance to consolidate your existing mortgage and your credit card debts into one monthly payment under one interest rate. If you can live off your savings until you find a job, the refinance could be a life saver. But, if you can’t find a job before you empty your savings, or if you have to live off the credit cards that you just paid off with the refinance, you will only end up digging a deeper financial hole.

If you are in financial straits, and you want to pay your debts and save your home, consult a financial advisor to determine all of your options before choosing to refinance.

Have you Refinanced Before?

Some resources recommend that you refinance as many times as it takes to save money. The belief is that, you will ultimately save more money as your rates drop with each new refinance. However, other sources caution against multiple refinances for several reasons:

First, if you have to pay fees and closing costs every time you refinance. The closing costs could easily be thousands of dollars each time you refinance, and you need to be able to recoup those costs to see any financial benefit.

For example, if you refinance and save $100 on your monthly payments, but have $3,000 in closing costs, you would need to keep the new loan for 30 months to break even, If you refinance before those 30 months are up, you will have to pay closing costs again, having not broken even on the first closing costs. If you continually refinance to chase interest rates, you could end up paying thousands of extra dollars, and never break even.

Second, refinancing could extend the life of the loan, which could have you paying more in the long run. For example, if you do a cash-out refinance of your first mortgage after ten years, with a 30-year fixed rate, you will have essentially erased the ten years of mortgage payments that you made. Each time you refinance, even if you get a lower interest rate, you will essentially be starting the clock over and eventually end up paying more than if you had just refinanced once, or not at all.

If you have already refinanced your mortgage once, be extra cautious before you do it again.

How is Your Timing?

As was mentioned earlier, refinancing when you have already paid a substantial amount of your existing mortgage could end up costing more than if you had stayed with the original loan.
Additionally, if you don’t plan on selling the home in the near future, you could be better off keeping the mortgage you have because you have to recoup your closing costs.

If you are not planning to stay in the home at least five years, or if you have paid off a large portion of the mortgage, you should be less likely to refinance unless you really need to turn some of that hard earned home equity into cash.

Other Considerations

The value of your home will have a lot of bearing on how much you can finance, and even whether or not you can finance at all. If the current value of the home is less than the amount you still owe, you could have difficulty refinancing. You might qualify for the Home Affordable Refinance Program (HARP) if you are up-to-date on your current mortgage. HAMP will lower your mortgage payment. The Obama loan modification program is a better option for those homeowners in financial hardship.

Your credit history and credit score will also have bearing on your loan options.

Even if you’re not considering  refinancing, you should check your annual credit reports from one or all of the three major credit bureaus. You should check local land assessment information for information on the value of your home, and the other homes in your neighborhood.

Final Perspective

I have tried to maintain a fairly timid and cautious tone in this article. This is so you won’t just jump into just any romantic loan offer that comes your way without giving it some serious thought. Now that I have said that; It’s August of 2016 as I write this and I can’t think of a better time to refinance in the entire US history. Rates are as low as they will ever get. So make sure you are making a good decision, but do it before the years end!!

Under the right circumstances refinancing your mortgage could be a positive experience. The key is in making sure you that have a strong financial foundation, and that a home loan refinance will actually benefit you. Continue reading related resources on trustworthy resources such as this finance blog until you are sure you are making a sound financial decision.

ARM – Borrower Considerations

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