One common reason—even the primary reason—for people to refinance their home in recent years has been to take advantage of low interest rates. Now that rates have begun to edge up, is refinancing out of the question? Not by a long shot. Refinancing isn’t always just about the rate; the entire structure or term of your mortgage can change when refinanced. In fact, there are several situations unrelated to interest rates that could lead you to consider refinancing.
Scenario #1: You’re making more money and want to pay off your mortgage sooner
When you were settling into your first home, paying your loan off in just 15 years may have seemed out of reach. But now maybe you’re bringing home a larger paycheck, and getting your home paid off faster is a more realistic goal. By taking on a shorter-term mortgage, you’ll pay less interest overall, even though your monthly payment may be higher. A refinance calculator can give you an idea of how much you’ll save in the long run and how much your monthly payment will change.
Scenario #2: You need to lower your monthly payments
If lower mortgage payments would be a better fit for your current situation, you could consider refinancing to a longer term. Keep in mind: Extending your term will increase the time it takes to pay off your home, as well as the amount you’ll pay in finance charges over the life of the loan.
Scenario #3: You’ve gotten married or divorced
If you’re a homeowner and have recently gotten married, you may want to refinance to add your spouse’s name to the title. On the other hand, if you’ve gotten divorced and either you or your spouse plan on keeping the home, a refinance may be in order to release the other from financial responsibility and any rights to the home. It’s less about money or time saved and more about making sure ownership goes to the appropriate party who is financially responsible for future payments.
Scenario #4: You have renovation plans
Home values in the U.S. have risen 8 percent in the past year alone and are expected to keep rising.1 You may be able to take advantage of your potential increased home value and equity through a cash-out refinance, which essentially means signing a new mortgage for more than you actually owe and taking the difference in cash.2 You may then be able to finance those updates (think: finished basement, new bathroom) and make your house feel more like your family’s home.
A refinance does require closing fees, so you should speak with a loan officer to weigh the pros and cons for your own particular situation. Closing costs vary, but typically range from 2%-5% of the loan amount. Also note that cash-out refinance availability and amount are both subject to loan-to-value ratio requirements and an appraisal will be required.
Cash-out refinance example:
Value of home: $250,000
Owed on existing mortgage: $156,000
Cash needed: $40,000
Closing costs: $4,000
You could potentially refinance the mortgage for $200,000 and receive a check for the balance, minus closing costs.
Scenario #5: You need cash for a non-home-related expense
While refinancing is often used for home renovations, it can also be considered for other expenses. Maybe your child is headed off to college or you’re dealing with other unexpected expenses. A cash-out refinance may be a better option in terms of rate and predictability compared to a line of credit or personal loans that may come with high interest rates or rates that can fluctuate over time.
Consult your financial and tax advisor for advice regarding tax details and the advisability of converting other debt to debt secured by your home.
Of course, there are still reasons to refinance that are more closely tied to interest rates. You may have improved your credit score over the years since you purchased your home and want to negotiate a better rate. Or maybe you have an adjustable-rate mortgage, where rates can change over the years, but you would like to change to the certainty of a fixed rate. Whatever your reason, you’ll want to work with a lender to crunch the numbers and determine if refinancing makes sense for your current situation.
1 “United States Home Prices & Values,” March 31, 2018, Zillow.
2 Cash-out Refinance not currently offered in Texas.
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