What You Need to Know About a Home Mortgage Refinance
At the risk of oversimplification, the only real argument for refinancing a mortgage on your home is if it helps you. All other factors serve this main purpose and so should be at the end goal of any decision-making process. However, the process of achieving that goal depends on a few factors and many homeowners get confused about the process.
In this article, we will share all that you need to know about a home mortgage refinance.
Why would one want to refinance their home mortgages?
There are many reasons refinancing a home mortgage can make sense for you. For example, if your income has risen significantly than when you first bought your home, going for a shorter-term loan will decrease the interest you pay while shortening the amount of time that you are allowed to pay the debt. While this will increase your monthly payments, you could potentially save more by putting more of your money into the principal loan.
Refinancing can also be done to take equity out of a property to convert into cash for emergencies or to cover the cost of home improvements. In the case of the latter, homeowners are able to substantially reduce the balance owed to the mortgage and increase the value of their home, provided that they are able to recoup the costs of a refinance in a reasonable amount of time.
In other words, many homeowners look to refinance because of significant changes to their lifestyle. Refinancing offers opportunities to improve one’s financial situation, which is why it only makes sense if it helps you.
When is it a good idea to refinance your mortgage?
Whether or not a refinance makes sense will depend on your financial situation and goals. In this case, the biggest factor to consider is the interest rate. Generally, low-interest rates will mean that more of your monthly payment goes towards paying the principal. Again, if your income has increased significantly since you first purchased your home, it may be best to refinance and get a shorter-term loan.
Given that interest rates are low, however, it can also make sense to get a longer-term loan if your finances are unstable. Just make sure that you are aware, that even with lower interest rates, you will likely pay more interest in the long run just to decrease your monthly payments.
When is refinancing your mortgage a bad idea?
Refinancing a mortgage can be objectively good or bad depending on your ability to recoup the expenses of a refinance, and whether or not it helps achieve your goals. Refinancing comes with costs; if you are going for a longer-term, you are effectively going to pay more in interest, even as it will make your monthly payments smaller. Refinancing to a shorter-term loan also only makes sense if the increase in monthly payments is manageable.
What are the costs of refinancing?
The costs of refinancing can run anywhere from $1500 to as much as $5000 in closing costs, depending on your lender and location. Closing costs include any relevant taxes, appraisal fees, title expenses, origination payments, attorney charges, and flood certification fees. Before deciding on a refinance, make sure that recouping these expenses, along with your new monthly payments, is attainable with your financial goals.
Refinancing can be a valuable tool to take advantage of falling interest rates. It can also represent a viable opportunity to improve your lifestyle. However, ensure that you are aware of the possible pitfalls of refinancing and the resulting fees and terms.
Our team of mortgage professionals in Colorado is here to help you make the right decision. If you require expert financial advice regarding mortgages and home purchase requirements, get in touch with us today to see how we can help!