When Is Refinancing A Mortgage Worth It? A Complete Guide

When Is Refinancing A Mortgage Worth It? A Complete Guide

A mortgage is a loan specifically meant for property development or purchase. Refinancing a mortgage means paying off a loan and replacing it with a new one. 

The decision to refinance your mortgage will depend on many factors, including the loan duration, prevailing interest rates, the loan estimate, how long you plan to live in the property, e.t.c. It is difficult to know whether refinancing a mortgage is a good idea as it will ultimately come down to the reasons for financing. 

The following are situations when refinancing a mortgage might be worth it:

To Secure A Lower Interest Rate

An excellent reason to refinance a mortgage is to get a lower interest rate, which is a good idea when you consider you will be paying the loan for decades. You should particularly refinance your mortgage when market interest rates drop after an announcement by the Federal Reserve. Most experts say you should refinance your mortgage if you can reduce it by 2%. 

You should hence understand your APR and visit loandepot.com for the best mortgage rates. It helps to have an excellent credit score when refinancing your mortgage to get the best interest rates. Reducing your interest rate will not only save you money but will increase the rate of equity buildup in your property.

To Consolidate Debt

Many people are drowning in debt and will refinance their mortgage to consolidate their debt. Debt consolidation is one of the main strategies to reduce your debts. Though it does not erase your debts, it makes it easier for you to pay them. 

Replacing high-interest debt with a low-interest mortgage is a good idea and reduces the amount you have to pay. However, it requires financial responsibility, and you should only do it if you are sure you will not spend the money once the refinancing frees you from debt.

To Access Your Home’s Equity

Homeowners will often access the equity in their homes to cover significant expenses like paying for life insurance, college education, or renovating their homes. They will justify the additional debt, for example, to remodel as it will increase the property’s value. The interest on the new loan may also be lower than the interest on the previous mortgage, which helps save money. 

Cash refinancing is especially popular among modern homeowners. You can access your home’s equity through a cash-out refinance if you will have at least 20% equity after completing the transaction. Cash refinancing rates are often higher than rate-and-term refinance rates, but it is still one of the cheapest ways to borrow money.

To Shorten The Loan’s Term

When interest rates drop, you can refinance your mortgage, not to get lower interest rates but to shorten the loan’s duration. 

Even though the interest rate and monthly payments might rise, for example, when refinancing a 20-year mortgage to a 10-year mortgage, you will pay less interest over time. The amount you save on a shorter loan term due to fewer interest payments will be particularly beneficial if you do not include the mortgage interest deduction on your tax return.

To Change An Adjustable-Rate Mortgage (ARM) to A Fixed-Rate Mortgage (FRM)

ARMs typically offer lower interest rates than FRMs in the beginning. However, with time as interest rates rise, a fixed-rate mortgage may become more appealing than an adjustable-rate mortgage. You can refinance your mortgage to take advantage of the lower interest rates in the FRM. Conversely, if prevailing interest rates fall, you can switch from an FRM to an ARM to take advantage of the opportunity by refinancing your mortgage. 

Refinancing your mortgage is worth it if it shortens the duration of your loan, gives you a lower interest rate, helps consolidate your debt, builds up your home equity, and reduces your monthly payments. However, it would be best if you were financially prudent when refinancing your mortgage. Otherwise, you will be in a worse financial situation than before the refinancing.

When Is Refinancing A Mortgage Worth It? A Complete Guide
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When Is Refinancing A Mortgage Worth It? A Complete Guide
BDC October 2022 issue - 297

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