When can you or should you refinance your home?

Your home’s financing isn’t final. The decisions you made when you bought your home were based on your financial situation at the time. However, your income, the mortgage market and the real estate market can change. This is why you should always assess the applicability of your mortgage to your current situation and future plans to determine if a refinance is in order. There are a variety of reasons why you might want to refinance:

  • Take advantage of a lower interest rate. Rates have been at historic lows, but there is no guarantee how long this will last. If you can get in now before they begin to climb, you can keep your monthly payments low.
  • Opt for a fixed rate over an adjustable-rate mortgage. If your current loan is an ARM that will soon adjust upwards, you might prefer the stability offered by a fixed-rate mortgage.
  • Access needed cash. Cashing out a certain amount at a mortgage’s much lower rate to pay off a debt — say, a credit card — at a much higher rate often makes solid financial sense.
  • Change your loan terms. Opting for a shorter loan term — say, 15 years instead of 30 — will help you pay off your debt sooner and save significant money over the term of the loan. If your income has decreased you may wish to extend the term of the loan.
  • Cancel private mortgage insurance. PMI is required of borrowers who put down less than 20 percent on their home. If you’ve been in the home a while, you may have gained enough equity so that you no longer need the PMI.
  • Consolidate your first and second mortgages. This could mean significant savings for you over the long haul.

Whatever your reasons for wanting to refinance, there are a number of factors you’ll want to consider. For starters, you want to make sure that your current loan does not have a pre-payment penalty for refinancing. 
Another key concern is whether or not the costs of a refinance are recouped by your lower rate. All loans have closing costs associated with them, and you want to make sure that whatever savings your new loan delivers will also be worth the closing costs. Typically, you want to recoup your closing costs within two years. 
As you can see, there is a lot to consider, which is why it makes sense to sit down with a home financing expert and review all the key considerations and do all the necessary calculations to ensure you’re making the smartest financial decision you can.

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