Refinancing your mortgage, which essentially means replacing your current mortgage with a new one, can offer significant savings. However, based on your financial situation and the terms of the new mortgage you refinance to, your decision could also backfire and leave you financially worse-off. So, how do you decide whether you should refinance? Read on to know.
Lower lifetime interest cost
If you find a new loan with a lower interest rate, you could save a lot of money over time by refinancing. However, make sure to also check the lifetime interest cost. While some loans have a lower interest rate, the total lifetime interest cost may increase, especially if you opt for a longer term.
Lower monthly payment
If repaying your current mortgage is becoming a hassle, you may want to refinance to a new mortgage with a lower monthly payment. Although, keep in mind that doing this could increase the total cost of your loan. However, you are better off doing this than running the risk of possibly defaulting on your loan payments.
Helps you get out of an adjustable-rate mortgage
You may also want to refinance to a new loan to reduce risk. So, if you are currently on an adjustable-rate mortgage with a high-interest rate, you may want to refinance to a fixed-rate mortgage.
Funds for debt consolidation
Refinancing your home loan can help you tap into the equity you’ve built up and use the funds for other purposes like debt consolidation. Given that mortgages usually have a lower rate of interest, it makes sense to borrow against the equity in your home to repay high-interest debts.
Eliminating mortgage insurance
If you opted for an FHA loan, you’ll need to mandatorily pay for mortgage insurance throughout the loan term. If you want to save on these payments, you can choose to refinance to a conventional loan.
While these are some good reasons to refinance your mortgage, ensure that you take the closing costs, prepayment penalties, and the other terms and conditions of the new loan into consideration before you make your decision. Refinancing your current mortgage loan only makes sense if the money you stand to save by refinancing will outweigh the potential costs.