Now that mortgage rates are at historic lows, refinancing is more popular than ever.
Homeowners everywhere are wondering, “Should I refinance, too?” The answer isn’t always cut and dry. Whether or not you should refinance now, later or never depends on your particular situation.
Here are some examples of when refinancing is a good idea and when it’s a bad idea.
When Refinancing Is a Good Idea
Situation 1: You currently have a mortgage with an interest rate that is significantly higher than the current going rate. For example, if you’re currently paying 6.5% for your mortgage and you can qualify for a refinance at 5.5%, you can save a good chuck of change each month.
Situation 2: You have an adjustable rate mortgage (ARM) you think will reset to a higher rate than you can currently lock in. Getting a fixed rate mortgage or even another ARM with more favorable terms can provide you with better peace of mind.
Situation 3: If you have built up equity in your home and you need money for a large expense like a home improvement project, a “cash-out” refinance might be a good idea. Investing in your home now is smart because labor costs are down.
When Refinancing Is a Bad Idea
Situation 1: You don’t plan to live in the house long enough for the refinance savings to offset the cost of the loan. Refinances can cost thousands of dollars, which is tacked onto the loan principal. It can take one to three years to reach the break-even point. If you sell the house before the break-even point you will have lost money on the refinance.
Situation 2: You’ve been paying on your 30-year mortgage for 10 or 20 years already and you plan on refinancing into another 30-year mortgage. In this situation, your monthly payments could be lower, but you’ll end up paying a lot more in interest over the life of the loan.
Situation 3: You don’t have any equity in your home or you’re underwater on your mortgage. You may not be able to take advantage of the best rates if you plan on borrowing more than 80 to 90% of the home’s value. If you are underwater in your mortgage, you won’t even be able to get a new loan that will pay off the old one. Instead, you should look into a loan modification.
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