Thinking of refinancing your mortgage loan? Read this to make sure it’s worth your time.
Turn on a TV or listen to Pandora and you’re likely to hear about the perks of refinancing your mortgage loan. But, what is refinancing? Why would you want to refinance? Is it right for you and your financial situation? Read on to get the answers to these questions.*
What is refinancing?
Refinancing is a method of replacing an existing loan with a new loan that will pay off the debt of the old loan. It’s like musical chairs… but for loans.
Why would I want to refinance my mortgage loan?
Here are a few reasons why you might consider refinancing, and the pros and cons of each:
You want a better interest rate
The most common reason for refinancing a mortgage loan is to get a better interest rate. A lower interest rate will lower your monthly payments and help you pay off your home faster. Of course, there are costs associated with refinancing, so make sure to check into those first.
You want to change your loan term
Often, homeowners will want to reduce their loan term to pay their home loan off faster, but that will increase your monthly payments. You can also increase the term of your mortgage. That will reduce your monthly payments but increase your interest rate payments long-term.
You want a different type of mortgage loan
Some homeowners want to change their type of loan from a fixed to adjustable, or vice versa. A fixed rate mortgage means you’ll pay the same interest rate over the life of your loan, while an adjustable rate mortgage means you’ll pay a variable interest rate that changes based on the market. Sometimes, you’ll save money with an adjustable mortgage.
You want to consolidate debt
Homeowners will sometimes look to consolidate their mortgage loan and credit card debt. When you have equity built up in your house, you can combine your debt (home and credit card, in this case) and pay down the two sources of debt at a lower interest rate. For example, credit card interest can hit 15%, while most mortgage interest rates are 3-4%.
Is refinancing right for me?
Before refinancing your mortgage loan, it’s important to talk to a financial expert—most likely your lender or financial planner. There are great free tools like this refinance tool from NerdWallet that can help give you an idea if the process of refinancing will be worth it.
As a general rule of thumb, if interest rates are on the decline and/or you’d like to tighten up your credit card debt, refinancing is a good option to explore.
*As always, it’s important to understand that this article is meant to be used as a guideline and what is best for you might differ based on your specific situation. For personalized advice, make sure to give us a call!