Refinancing a mortgage can provide substantial benefits for many people, but surprisingly, refinancing isn’t always the best option. The answers to several questions may help you to determine whether refinancing would help you or if there’s a better option.
Do you need to refinance to obtain cash?
If so, then a line of credit on your current home, a short-term loan, a personal loan or another method might be more beneficial, particularly if you have a low interest rate on your current mortgage. Refinancing can cost between 3 and 6 percent of the loan, so it’s expensive, and other options may be preferable.
Do you plan to move within the next few years?
If so, then it might be more cost-effective to keep your current mortgage. The fees associated with a mortgage often take years to recoup, so it might be more expensive for you to refinance shortly before you move.
Do you want to eliminate your mortgage payment before you retire?
If so, then refinancing into a 10-year or 15-year mortgage might help you achieve that goal.
Do you anticipate a reduction in income or a job loss?
If so, then you might want to refinance so that you can have the lowest possible mortgage payment.
Do you have a relatively high rate or a flexible rate?
If so, then it might be to your advantage to refinance. Opinions vary, but usually, if you can reduce your interest rate by 1 or 2 percent, then refinancing will probably benefit you. If you have a variable rate and the current rate is low, then refinancing may be a viable option for you. It’s impossible to predict rates, but a low fixed rate is always preferable to an interest rate that may rise.
What are your motivations for refinancing?
Before you decide to refinance, make sure that it will be financially feasible for you and that the outcome will benefit you. If you have amassed high debt because of credit cards and auto loans, then eliminating the high-interest cards and loans may help you, but only if you don’t incur the debt again once the cards have no balance.
Refinancing can be a savvy financial tool for the right reasons. Otherwise, it will cost you money and time, so make sure it’s the best financial tool for you to use