When should I refinance?

What are the usual reasons to refinance your current mortgage? The answer to this question can be narrowed down to a few common reasons. Here are five main examples:

Let’s start with the basic reason of lowering your monthly interest rate. To justify such a refinance for rate purposes, you need to understand how the difference in rate saves you on a monthly basis. This savings needs to then be broken down into a timeframe to recoup the costs associated with refinancing. Otherwise, determine how many months or years does it take to make back the total costs incurred with refinancing. Typically, a two to four-year time frame is acceptable but each person must determine what they consider an acceptable timeframe.

The next reason is for the purpose of lowering the term of your mortgage. This option is chosen when you decide that paying off your mortgage early is a priority and you also have the available extra income to pay the higher payment that comes with lowering the term. As you want to keep the costs to refinance to a minimum, your focus is knocking off many years from your current mortgage. Typically, people refinance their 30-year mortgage to a 15- or 10-year term saving thousands of dollars in interest.

Another common reason to refinance is for the purpose of taking cash out. Cash out may be taken for the purposes of home remodeling, paying expenses, debt consolidation or even putting in a pool just to name a few. Typically, the debt consolidation purpose is not only to get debt squared away on your credit report, but it typically lowers your overall total monthly expenses.

A fourth reason for refinancing your current mortgage is to simply lower your monthly mortgage payment. This is typically accomplished with the first reason of lowering your interest rate but there are other circumstances such as increasing the term to a higher term that sometimes occurs when it is simply necessary to lower your monthly expenses. It is not the ideal reason to refinance and doesn’t happen a lot, but sometimes personal financial circumstances require it.

Lastly, one final common refinance reason is to change from an adjustable rate mortgage to a fixed rate mortgage. Adjustable rate mortgages are usually best suited for people that know they are only going to own a property for a specific period or people that just wanted to take the risk of the rate changing in the future by having the absolute lowest payment for the near future. A definite riskier mortgage that gives you good reason to refinance to a no risk fixed rate mortgage.

With all the above reasons stated, you can easily see why it is beneficial to work with a mortgage professional to sift out all the factors relating to each refinance situation. It is easy for you to get a general understanding of the purposes of refinancing but having someone who is skilled at working with each unique situation is very important to finding out whether it is a true benefit to refinance.

-Terry Reynolds, Sibley Mortgage Group

 


* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.