As a homeowner, you may fully understand the impact of your mortgage debt on your budget and financial situation. The monthly mortgage payment is often by far the most expensive debt that you are responsible for each month. However, with this payment, you enjoy the mortgage interest tax deduction as well as the ability to accrue more equity in your with regular principal debt reduction. Refinancing a home mortgage will essentially change all aspects of your home mortgage. While there are strategic benefits associated with refinancing a home mortgage payment, it should be done with care because of how significant the impact can be on your current and future finances. These are some of the key instances when refinancing a mortgage makes sense.
When You Have Substantial Equity in the Home
There are two main types of mortgage refinances. One is a rate and term refinance. With this type of refinance, you generally obtain no cash out, and this means that your total home debt changes minimally. You may roll closing costs into the new loan, so you may see only a slight increase in your mortgage debt. The other type of refinance is a cash out refinance. With this type of loan, you may pull equity out of your home up to the lending limits available. In most cases, the combined first and second lien debt cannot exceed approximately 70 to 80 percent of the home’s value. Each loan program is different, so you will need to compare the options to determine which one may provide you with ideal loan terms. With this loan type, your home debt increases. The most common reasons for pulling equity out of a home are to consolidate debts and to improve the home. When you consolidate debts, you may enjoy lower monthly payments overall, and you may also make the interest on your consolidated debts tax deductible. When you improve your home, you may be re-establishing more equity in the home through an improvement in property value.
When You Need to Lower Your Rate
Another reason why you may consider refinancing your loan is to lower the rate. This is often done with both cash out and rate and term refinances. Lowering your mortgage interest rate can result in lower monthly debt payments, and this is particularly true with a rate and term refinance. Lowering the rate can, however, impact your related mortgage interest deduction. If you are dependent on this deduction for your tax liability, you may lower your interest rate with care. Keep in mind that lowering your rate can help you to accrue equity faster.
When You Need to Adjust Your Payment
Almost all refinances will adjust your payment upward or downward. You should always receive several loan quotes and plug the numbers into your budget to ensure that the new payment is affordable. Some people are able to save several hundred dollars or more on their payment by refinancing. For example, if you do a rate and term refinance with a lower interest rate, you may be taking out a new loan with a lower starting principal balance, and you may also enjoy the added impact of less interest. On the other hand, if you adjust your mortgage to a shorter term and the principal balance stays roughly the same, the payments may actually increase.
When You Want to Alter the Loan Term
Many homeowners decide after a few years of ownership that they want to escalate their payments and pay the mortgage off more quickly. For example, you may have received a raise or two over the years, and you may now be able to afford more substantial debt payments. Perhaps you want to retire sooner than you initially planned, and you want to establish the house debt on a faster repayment plan. Refinancing is a great way to set up the debt on a shorter term. Switching to a shorter term means equity will build more quickly.
When You Do Not Plan to Move for a Few Years
Refinancing is not a free process. Many of the same closing costs that you incurred when you originally purchased the home will be in place when you refinance. This includes an appraisal, a title commitment, lender’s fees and more. Generally, you do not want to incur these costs without enjoying significant financial benefit in some way. With this in mind, it is typically not advisable to refinance unless you plan to hold onto the property for several more years.
As you can see, there are many reasons why you may wish to refinance your home loan. Each homeowner has a unique financial situation to consider, and because of this, each will need to review his or her own circumstances to determine if refinancing makes sense. By fully analyzing the pros and cons associated with refinancing, you will be able to determine if now is the right time for you to refinance your mortgage.