Should You Refinance Your Home?
With the United States mortgage rates below 6%, and staying there it may be a good time to consider whether or not you should refinance your home.
There are numerous benefits to refinancing but also some negatives that you will want to consider, especially if you plan on refinancing your home for more and taking out some of your equity.
Should You Refinance Your Home Now?
Here are some reasons to consider refinancing your home:
- If you bought your home when interest rates were significantly higher it could lower your payments and save you money
- If your credit was bad at the time you bought your home you may have paid a higher interest rate. Good credit can help you get the best mortgage rates.
- If you have an adjustable rate mortgage then it is a good time to get out from under that.At some point the interest rates will begin to climb again.
- If you have private mortgage insurance on your home you may be able to drop that expense with a mortgage loan refinance.
- If you have a 30 year mortgage term, with the lower interest rates you may be able to switch to a 15 year mortgage and pay a similar, or even lower, payment. This will get your home paid off quicker.
- If you have significant equity in your home and have a lot of high interest bearing debt, student loans, or want to do some upgrades on your home then refinancing for a higher amount to allow debt consolidation may be a great idea. If you do this you must be careful that you don't fall back into the credit card trap.
When NOT to Refinance Your Home
You should not consider refinancing your home if any of the following apply:
- You plan on moving in the next two years. If this is the case you should consider a Home Equity Line of Credit, or a HELOC. Refinancing will cost you several thousand dollars in closing costs, money you will not make back if you move too soon. I will discuss Helocs a little later in this article.
- If your credit is worse than it was when you got the original mortgage on your home. It will be harder to find low interest rates.
- If you have any doubts don't do it!
- Never refinance because debt collectors are pushing you to do so. This is their job.
Remember that when you "roll your debt" into your home loan you are basically trading unsecured debt for secured debt. In other words, if you are having credit problems and are having difficulty paying for your car you may get your car repossessed. However, if you pay off your car with the equity from your home,and then can't pay the bill you run the risk of losing your house. Be wise.
Refinancing is similar to applying for a home mortgage loan. Your credit will be checked and your debt to income ratio will be examined closely. There will be another appraisal on your home as well. You may have several loan options available to you so talk to your loan counselor. You may also be able to choose point options.
If your credit is good you may be able to find a no closing cost mortgage refinance that has no fees associated with it. If you are not able to get one of those be sure to at least ask your lender to waive fees for things like:
- recording fee
What About A HELOC?
A HELOC is a Home Equity Line of Credit. If you have been in your home for awhile and built up equity you can borrow against your equity for a lower interest rate than you would get with your credit card. There are no closing costs with the HELOC but the interest rate is higher than with the mortgage refinance loan and the rate can go higher depending on the prime interest rate.
If you want to put your home on the market but need the funds to fix it up before you sell then a HELOC is a great tool to use. Some other times that you may want to use a HELOC rather than refinancing your home are:
- Debt consolidation-but only if you are not going to use credit cards again. Most people who use HELOC's to get out of high interest debt continue to use the cards and find themselves in a worse position within a few years.
- If you are planning on adding something that will ultimately pay for itself; insulation, solar panels, etc.
- If you have a serious need and cannot get it financed any other way.
Be careful. By getting a HELOC you are using your home as collateral and risking it.
Be money smart. Use the interest rates and slow market right now to your financial advantage if you can. Be careful, however, not to risk what you all ready have.
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