To Refinance or Not to Refinance, That is the Question...
You may have heard talk of refinancing your home loan as an option to save money. While this can be the case, it is not always so. Read to learn about when a refinance might be in your financial best interest, and when it might cost more than it is worth.
What Does it Mean to "Refinance?"
When you refinance, it means you pay off your existing loan and replace it with a new loan.
Why Might I Refinance?
There are many reasons someone might refinance:
1. To lower your interest rate.
One of the most common reasons to refinance is to lower your interest rate. By lowering your interest rate, you may be able to lower your monthly payment and increase the rate at which you build equity. A mortgage expert can help you see how current market rates compare to your home loan rates so you can decide whether or not a refinance would be beneficial.
2. To shorten the term of your loan.
Many people have a personal goal of paying off their home loan and being mortgage free. Refinancing to shorten the term of your loan, for example, from a 30-year fixed to a 15-year fixed, can help make this goal a reality in a shorter period of time. In addition, if you do not rush this refinance and conduct it when market rates drop, you may be able make this adjustment without significant changes to your monthly payment. At O Capital Group, our local mortgage experts can help you track the market and give you alerts as to current rates. In this way, you can decide when it is the ideal time to refinance in order to meet your financial goals.
3. To change loan type. Refinancing may be an option when you want to change your loan type. For example, you may have initially got an adjustable-rate mortgage (ARM) to take advantage of the lowest rates possible. Now, you want to refinance to a fixed-rate mortgage in order to avoid a rate increase as the fixed-term period comes to an end. Refinancing may be a helpful option in this case to allow that change in loan type to take place. Conversely, you may be in a fixed-rate loan and want to switch to an ARM in order to take advantage of low interest rates. In either scenario, if you think a different loan type may better meet your needs, speak to a mortgage expert to discuss if a refinance may be in your best interest.
4. To tap into your home's equity.
Building equity in your home is a sound financial decision. In fact, owning a home and building equity is a key tool to building personal wealth. At times, however, it may be a financially sound decision to tap into your home's equity with a cash-out refinance. For example, some people make this decision if they are doing a major home remodel or are funding continuing education. Because these can be seen as investments that will benefit you in the long run (ie by increasing your home's value or leading to a higher paying job), one might determine they are worth tapping into their home's equity. If you have a major expense you feel is an investment in your future, you might consider a cash-out refinance to help make it a reality.
Think it is best to have your home's equity fund a major life investment or help consolidate debt? Watch to see some options!
5. To consolidate debt.
Another reason some people refinance is to consolidate debt. If you are able to replace high-interest debts with a lower-interest mortgage, it may be in your financial best interest to refinance. However, it is important to reflect on what initially led to the debt. If the same lifestyle and spending habits that led to the debt are still in play, simply rolling that debt into your mortgage is a band-aid solution. However, if the spending habits have changed or if the extenuating life circumstances that led to the initial debt are no longer in play, refinancing to consolidate debt may be a prudent financial decision.
How Do I Know if Refinancing is in My Financial Best Interest?
At times, refinancing can be a sound financial option. Ask yourself the following questions to decide if this may be a good tool for you:
* Will a refinance
- lower my interest rate?
- lower my monthly payment?
- help me pay off my mortgage faster?
- get me a loan type that better meets my needs?
- help me make a major life advancement?
If you answered yes to any of these questions - or if you need help exploring the answers to these questions - we are here to help. O Capital Group offers a free, no obligation over-the-phone or in-person initial consultation to discuss any of your refinance or home loan needs.
When Might a Refinance Not Be in My Financial Best Interest?
At times, refinancing does not make financial sense. If you answered "no" to the questions above, refinance likely is not in your best interest. Additionally, you will want to consider how much longer you plan to be in your home. The total costs associated with a refinance are typically 3-6% of the principal amount of the loan. Therefore, you will need to remain in your home for at least a few more years in order to recoup the costs associated with the refinance and begin benefitting financially. If you know you are planning to move in the very near future, it is likely not in your best interest to refinance.
Have any questions about refinance or home financing in general? We are O Capital Group, a locally owned and operated mortgage brokerage. Call today. We are here to help make home loans easy!
At O Capital Group, we make home loans easy!
Call today: (602) 492-8930
We love learning from your journey! Leave us a comment below.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.