Refinancing can help you lower your monthly payment or extract existing equity in your home. Often times this a great way to save money or to pay for home improvements or consolidate high interest debt.
But when should you refinance really depends on your current financial situation and your future goals.
What Is A Refinance?
A refinance is the process of paying off an existing loan with a new one in order to change the terms of the loans such as lowering your interest rate, extending your term or even borrowing money from equity that has already been built up.
There are two types of refinances:
- Rate and Term Refinance
- Cash Out Refinance
Rate and Term Refinance
A refinance that involves changing the interest rate or the loan term you have to pay off the loan. Depending on how long you have been in the house and what your current interest rate is, you can usually save a lot of money on refinance through a rate and term refinance.
When you refinance to a longer term, your monthly payment will be smaller but you will end up paying more interest over the life of your loan. When you refinance to a shorter term, your monthly payment will be higher but you will pay less interest on the loan overall, and pay the loan off earlier.
Cash Out Refinance
A cash out refinance allows you to withdraw the equity you have in your house. This refinance is typically only possible once you have built up some equity, usually after being in the home for a number of years or if the value of your home has increased considerably since you purchased it.
A cash out refinance is a great way to consolidate high interest debt, pay for home improvements or even pay for a child’s education.
So When Should I Refinance My Mortgage?
When Interest Rates Are Low
While refinancing to a longer term will help lower your payments, you will also pay more in interest of the life of the loan. This is why it’s important to refinance when interest rates are lower than your current rate.
An Example: Let’s say that when you bought your house 5 years ago, your fixed rate was at 4%. Now however, thanks to falling interest rates refinance offers are starting to give 2.75% fixed loans.
When You Need To Save Money Each Month
It never hurts to look into ways to reduce your monthly payments. Taking out a lower rate or longer term mortgage may be just what you need to get your finances back in order.
Pay For Home Improvements
Refinancing can provide you with the funds you need to make some home improvements and upgrade your house in order to increase its value.
When You Need To Consolidate Debt
A refinance may be a great way to consolidate debt on high interest credit cards or other loans at a lower rate of interest. This refi is also great for paying off high interest student loans which will help reduce the amount of money you have to pay over time.
Pay For Emergencies
If you have an emergency come up, refinance can provide the funds you need to cover debts or get your home back into working order.
Pay For Your Child’s Education
A refinance is also a great way to provide a child with some money for their education. If your child can take out a student loan, borrowing from refinance equity may be a better option if there is anything left after your own needs are met.
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