Knowing When to Refinance

Refinancing is a great way to lower your interest rate and consolidate debt, but it doesn’t always make financial sense for every homeowner. To help you determine whether you should refinance your mortgage, here are a few questions to consider.

How long will you stay in your home?

If you only plan to live in your house for a couple years, it’s best to keep your current mortgage since you will likely lose your closing costs. These fees can range between a thousand dollars to an excess of $8,000 or more, and it can take several years to recoup these costs if you refinance.

Before deciding whether to refinance, crunch the numbers. Lowering your interest rate is a good idea if you intend to stay in your house long enough to recover your closing costs. But if the savings you gain from refinancing doesn’t pay off while you’re there, then you might want to reconsider.

How much equity do you have?

This is an important question because refinancing could add more costs over the life of the loan if you’ve already started paying principal. For example, let’s say you’ve been making payments on a 30-year mortgage for the last ten years. If you refinance the same loan term at a lower rate, then you agree to pay your new mortgage for 30 years, not 20.

For homeowners who have a high interest rate but little equity in their home, refinancing is beneficial since it can lower your payments. But if you’ve built up a lot of equity, then refinancing could add more interest in the aggregate and extend your loan term.

Will refinancing keep you from losing your home?

Economic times are difficult for a lot of families and some homeowners depend on a lower interest rate in order to stay in their home. If refinancing means saving $200 a month so you can keep a roof over your head, then it might be wise to move forward with a lower interest rate or a different mortgage product altogether.

However, if money is not an issue you might consider refinancing to a 15-year loan.

“This might be skewed towards people who have more disposable income and want to pay off their loan faster,” says Bruce Luecke, vice president of product development at Nationwide Bank. “Certainly, the opportunity is to free themselves faster from housing debt, if that’s what makes sense for them personally.”