Top Seven Reasons to Refinance--and Three Reasons Not To
ByHome Worth Columnist
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With low mortgage rates kicking the home refinancing market back into high gear, it's harder to find objective real estate advice. Even under more stringent underwriting guidelines, most Americans can qualify for home refinancing. However, understanding the difference between a compelling reason and a red herring can determine whether you will retire with ease or face foreclosure within your lifetime. First, financial experts and industry analysts note the seven reasons you may want to consider home refinancing this year:
#1: Low Mortgage Rates Reduce Interest Payments
The biggest and best reason to refinance your home is also the most obvious. When mortgage rates drop, you can sign a deal that lets you pay less money for your home loan. A good mortgage refinance calculator can tell you exactly how much mortgage rates need to fall for your deal to make you money.
#2: Home Refinancing Enables Shorter Loan Term
In addition to lower mortgage rates, home refinancing allows you to shorten the term of your loan. If you can handle making larger mortgage payments, a 15-year term can save your household a significant amount of interest. See our early payoff mortgage calculator to determine if this makes sense for you.
#3: Eliminate Mortgage Rate Risk
Many adjustable rate loans carry volatile mortgage rates that can change faster than the broader markets, especially when promotional teaser periods expire. Refinancing now, while mortgage rates remain low, may cost a little more in the short run. However, this financial move can lock in the security of a fixed rate over a long term.
#4: Rebalance Your Loan to Value Ratio for the Long Run
If home prices in your neighborhood have gone down, you may qualify to refinance using today's property values. Although your home equity may have decreased, resetting your home loan under current prices and mortgage rates can protect you if home values drop further.
#5: Adjustable Mortgage Rates Can Prepare Your Home for Sale
Once you're sure that you'll be leaving your current home in the next few years, refinancing to an adjustable rate mortgage can provide extra cash flow for moving expenses or down payments. Use a mortgage calculator to determine whether you'll save enough money to justify the short term expenses of home refinancing.
#6: Complete a Home Refinance Before Major Life Events Change Your Status
Layoffs, sudden illnesses, and other major life events can wreak havoc on your credit score. If times are good now, but you worry about having enough of an emergency fund to handle unexpected expenses, refinancing under today's low mortgage rates can give you peace of mind. You won't qualify for the same low rates if you or your spouse are unable to work, which is why many experts recommend refinancing when few storm clouds are on your horizon.
#7: Low Mortgage Rates Chop Interest on Other Debt
Some personal finance experts advise against using cashed-out home equity to pay off credit card bills. After all, a defaulted mortgage can lead to foreclosure, whereas most defaulted credit cards simply lead to harassing collector calls. However, some homeowners can benefit from significant interest savings by consolidating debt through a home refinance. Just be sure to cut up your paid-off credit cards at the closing table.
Three Reasons Not to Refinance
Any of the above seven reasons should be enough to spur a session with a mortgage refinance calculator, to see the kind of financial impact home refinancing can have on your life. However, experts warn homeowners about acting on three more reasons to consider a home refinance deal. Despite attractive mortgage rates, not every home refinancing opportunity is right for everyone:
#1: Home Refinancing Lets You Live Beyond Your Means
For years, Americans enjoyed unparalleled real estate appreciation. Homeowners lucky enough to have bought in at the bottom rode waves of price inflation. It became easy to justify cashing out home equity to pay for luxury goods and expensive vacations. Now that property values have crashed down to earth, personal finance experts warn homeowners to avoid using property like an ATM machine. Home prices could still head farther south, creating pain for homeowners who can't make mortgage payments on buildings full of expensive baubles.
#2: Low Mortgage Rates Mask Long-Term Interest Costs
Some homeowners who missed earlier periods of historically low mortgage rates naturally feel like this could be the time to lock in savings. However, many borrowers with ten or more years of mortgage payments under their belts may not actually benefit from a home refinance. A mortgage calculator can show whether it really makes sense to spread twenty years of payments over an extra decade. Extra interest over time, combined with rolled-up closing costs, can end up costing you far more money than simply riding out an existing home loan.
#3: Mortgage Refinance Cash Lets You Invest on a Sure Thing
Business watchdogs and law enforcement officials across the country report a wave of investment fraud involving home refinance opportunities. Con artists playing the roles of savvy investors convince homeowners to tap home equity in exchange for shares in dubious enterprises. That equity disappears down the rabbit hole of a pyramid scheme shortly before ringleaders skip town. Using a cash-out home refinance deal to fund any kind of speculative investment rarely pays off.
When you understand your real motivations for a home refinance, you can make better decisions. Remember to always use a mortgage calculator to review break-even points, amortization, and long-term costs. With that information in hand, you can start shopping for the kind of mortgage rates that can help you achieve your financial goals.
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