Refinancing your home isn’t a one-size-fits-all solution. If the costs of refinancing outweigh the savings, or the benefits don’t align with your long-term goals, then staying in your current mortgage may be a better option. Ask yourself these questions before deciding to refinance your home to find out whether it’s the right move for you.
Why Do I Want to Refinance?
What are your goals for refinancing your home? Be clear on what it is you’re trying to accomplish before you jump into refinancing. Here are some common reasons homeowners might choose to refinance.
To Take Advantage of a Lower Interest Rate
If current interest rates are lower than your existing rate, the savings of refinancing at the lower rate can be considerable. The key to whether you’ll end up saving money is time — or rather, the total number of years that you’ll be paying off your mortgage. As a rule, the longer you’re in debt, the more interest you’ll pay, regardless of the rate. So paying off your mortgage faster by switching from a 30-year loan to a 15-year loan could slash your interest costs in half.
To Get Out of an Adjustable Rate Mortgage
The uncertainty that comes with an adjustable rate mortgage, where your payment could jump hundreds of dollars from one month to the next, is a good reason to take advantage of refinancing at a fixed interest rate.
To Lower Monthly Payments
A lower monthly payment doesn’t necessarily mean you’re saving money over time. However, if you find yourself in a situation where you’re struggling to pay bills, such as job loss or mounting medical expenses, refinancing at a lower monthly payment can help alleviate those financial stressors.
How Much Equity Do I Have?
Mortgage loans that don’t have an 80% loan-to-value ratio require you to pay private mortgage insurance (PMI) each month. PMI protects the lender in case you default, and these fees add to your monthly payment. You want at least 20% equity in your home before considering a refinance. The more equity you have, the less you pay throughout the duration of the loan.
What’s the Age of My Current Mortgage?
The way mortgages work is that you primarily pay interest for the first few years, regardless of whether it’s a new mortgage or a refinance. So if you only have 10 years left on your current loan, congrats! You’ve been making good progress on chipping away at the principal balance. But before you take a look at your home refinance options, consider this: If you start a new 15-year or 30-year mortgage, you’ll be back to making interest-only payments.
Can I Afford to Refinance?
The fees associated with home refinancing rates add up. Closing costs comprise the biggest fees, as much as 5% of the loan amount. It’s possible to get these costs absorbed into the new loan, but this may raise your monthly mortgage payment, rendering the goal of a refinance moot.
One option is to pay closing costs in full rather than financing them. This strategy helps you avoid having higher payments down the line, but it also means you’ll need to come to the table with cash.
What Are You Financial Goals?
Refinancing a mortgage affects more than just your monthly payments; it also impacts your overall financial portfolio. Connect with a Farm Bureau advisor today to discuss your goals.