Refinancing your home mortgage can be a good way to lower your payment and save big money. There are several reasons why you might want to refinance, and you have to weigh the pros and cons of each situation to make sure refinancing is a good idea.
Getting a lower rate
One of the main reasons people refinance, and one of the best reasons to do so, is to get a lower interest rate. If you can lower your mortgage rate by a half a percentage point or more, you can significantly lower the monthly payment on your loan and save money on overall financing costs. In most cases, you will have to pay full closing costs on a refinance, so you have to weigh the savings from the lower rate against the amount of closing costs to calculate how long it will take you to break even on your refinance. Working with a lender such as Flagship Financial can help you decide if refinancing to lower your rate is the right decision.
Shortening your term
Another reason many people choose to refinance is to shorten the term of their mortgage. Most people use a 30-year mortgage when purchasing a home, which makes the monthly payments lower but means you pay much more in financing costs over the life of the loan. By refinancing into a 15-year mortgage, you save big on your overall finance charges, although you may wind up with a higher monthly payment because of the shorter term. While shortening your loan term can be a good idea, you have to be sure you can afford higher monthly mortgage payments.
Converting from adjustable rate to fixed one
If you took out an adjustable rate mortgage to get an ultra low interest rate on your mortgage, you could be faced with the prospect of a large rate increase if rates are heading up, so you might want to refinance your mortgage to get a fixed rate. If rates stay low, you might want to refinance to a fixed rate mortgage to lock in a low rate and not take the chance that rates will go up later. In either case, refinancing should save you money by removing the risk of your rates increasing in the future.
Refinancing your mortgage can save you big money in the long run, but you must make sure the conditions are favorable for you to do so. Make sure your credit score is good enough to get the lowest rate and be sure you will be staying in your home long enough to benefit from the savings of a refinance.