Refinancing can be a great financial tool, but only if your reason is really geared toward one major goal: saving money. We previously released a blog about some benefits of refinancing, which include lowering your interest rate, converting your loan to ARM/fixed-rate, shortening the loan term, or accessing equity to consolidate debt. And these benefits still stand, but refinancing should not be a light decision. Refinancing has some short-term and long-term implications, both good and bad, so think hard before you decide to do it. Here are some good and not-so-good reasons to refinance your home.
The Wise Way
One reason refinancing can be good is to increase your long-term savings. Refinancing can help with this through lowering your interest rate, which will decrease your mortgage interest, saving you money over the life of the loan. It can also mean a smaller monthly payment, which allows you to put away money into other investments or retirement accounts in the future. Or you can do the opposite and increase your monthly payment while lessening the length of your term, meaning you may be able to retire earlier, depending on your spending habits and lifestyle. Closing costs are applied to refinances, so ensure the savings outweigh that cost.
Another good reason to refinance is to pay off credit card debt but note that this can also be one of the worst reasons to refinance. If you’re carrying a lot of debt and your credit score is low and you need to remedy your situation quickly, a refinance can help. But you must be sure that you truly pay off debt and no re-accrue it all back. If you refinance your home, pay off your debt and get your DTI ratio to a good place and stay on track, a refinance would be a great choice. But if you rack up debt again, you’ll end up doing more damage.
Getting rid of your private mortgage insurance (PMI) is another great reason to refinance. This monthly cost could be eliminated through a refinance. You can also get out of an FHA loan through a refinance. FHA loans require mortgage insurance for either 11 years or the loan term, depending on your downpayment, and you can’t get rid of that once you hit 20% equity. The only way to get out of that is to refinance to another loan.
The Rough Road
Some poor reasons for refinancing a home loan include cashing out for a large, unnecessary expense, such as a shopping spree or a vacation. Naturally our needs and wants are all a little different, but what this reason has in common for all of us is this: a short-term focus. Once that vacation is over or the spending spree is done, you’re still stuck with that loan.
Some people want to refinance in order to skip a monthly payment during a rough time, but this rarely turns out well. That “skipped” payment is usually just tacked to the end of the loan, and even if you think the refinance is “free” with no cash out of pocket, it’s typically going to be rolled in through a higher interest rate or loan balance. Again, the focus is short term here. If you need help on a refinance, contact InterWest Mortgage for assistance.