Refinancing is something many homeowners toy with time and again. They see that interest rates are lower so they wonder if they should refinance their mortgage or leave it as is and continuing making the higher payments. There are many reasons to go both ways – there is no right or wrong answer that is the same across the board. You have to weigh the different options that you have.
What are your Plans?
The first question is whether or not you plan on staying in the home. If you are not staying, then you might not need to refinance. Why incur more closing costs and start your payments all over again when you will sell the home in 2 years? If you plan on staying, however, and you can reduce the interest rate enough that it makes sense to pay the closing costs because you will recoup the difference in a short amount of time, then refinancing might make sense.
What are the Costs?
Every loan has costs, some higher than others. This is one thing you can control because you can shop around with different lenders to see the normal closing costs for your area. One lender might charge you a point or two on the loan, while another won’t. You have to compare the loans side-by-side to determine which one is better, though. Sometimes paying slightly higher interest, but fewer closing costs make sense while other times the opposite is true. Really weigh the costs of refinancing to determine what the right choice is for you by determining how long it will take you to make up the closing costs in the savings you gain by lowering your interest rate.
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Take a No Closing Cost Loan
One time that it is absolutely 100 percent worth refinancing is when you can get a no closing cost loan. This means that the lender pays all of the closing costs. If you are able to pull that off and have your interest rate lowered, it makes sense to refinance because you will only refinance the outstanding portion of your loan and pay nothing extra. The savings you gain will go right into your pocket rather than filling your pockets back up after you emptied them to pay the closing costs.
A Safer Loan
Another reason that it is a good idea to refinance is when you refinance into a safer loan. By safer, we mean an adjustable rate to a fixed rate or a 30-year term to a 20-year term. Generally, a fixed rate for the lowest term possible is what is necessary to have a safe loan. Of course, if you work on commission or some other variable type of income, you might want the adjustable rate to take advantage of the low introductory rate, but down the road, it can become more expensive with its adjustments. If you are able to refinance into a fixed rate or a shorter term, which means your loan will be paid off sooner, then it is worth doing.
Every situation is different – you have to weigh the pros and cons for yourself to determine what is right for your situation. Sometimes refinancing only adds years to your mortgage and nothing else while other times it gives you a viable option to make your loan less risky or even shorter. If you can save money every month and you know that you are staying in the home for a while, refinancing often makes sense, even if it is only to save a little money every month because every dollar matters!
