Have interest rates changed? Has your credit score improved? Do you feel that you could get a better rate for your mortgage now? Do you just need a different kind of mortgage? These are the questions you need to consider when thinking about refinancing your mortgage. Refinancing a mortgage is generally when you pay off the existing mortgage and get a new one, but it can also involving taking out a second mortgage and combining them into a new loan. There are pros and cons to refinancing, so here are some things to consider when deciding if mortgage refinancing is right for you or not.
Potentially Lower Interest Rates
The interest rate attached to your mortgage determines how much you pay each month. The lower the interest rate, the lower your repayments. When market conditions change, or if your credit score improves, you may be eligible for a lower interest rate. A reduced interest rate could also allow you to build equity in the home faster. Refinancing can potentially lower your interest rates, and even a rate that is just 0.5% lower could add up to a lot of savings.
Adjusting the Mortgage Length
Increasing the length of the mortgage can be done to decrease your monthly payments, but keep in mind it also increases how long it will take to pay off the mortgage and the total amount you pay off due to interest. Decreasing the length of your mortgage is a good idea if you have the ability to pay it off sooner to get out of debt faster and reduce interest payments. This also means paying off more each month however, so keep this in mind.
Switching to a Fixed Rate Mortgage
The monthly repayments of an adjustable-rate mortgage or ARM will change as the interest rate changes. Payments on an ARM could go up as well as down. There may come a point that you aren’t comfortable with the idea that your mortgage repayments could increase. This is when you can consider switching to a fixed-rate mortgage to get the peace of mind that comes with fixed interest rates and repayments. Switching to a fixed-rate mortgage is also a good idea if you feel that interest rates are going to go up.
The Age of the Mortgage
How long you’ve had your mortgage is an important factor to consider. When the mortgage first starts, the majority of your payments are credited to the interest rather than the principal. The longer the mortgage lasts the more the principal is paid off and the better the equity of your home. Refinancing your mortgage restarts the entire process, meaning it isn’t worth it in the later years of a mortgage.
Are You Moving Soon?
If you’re planning on moving soon then you shouldn’t refinance your mortgage, especially if you’ll be moving before the mortgage term is over. You don’t want to be paying off a home that you aren’t living in. There’s also the chance that the savings you make won’t be worth the cost of refinancing, so use a break-even calculator to determine if it is worth refinancing.
There are several factors involved in determining if refinancing your mortgage is right for you. Think about the kind of mortgage you have, how long you have had it, and if you have any plans of moving or not. Talk to a financial planner to learn more about refinancing your mortgage and if it’s worth it.