Most people don’t necessarily refinance their mortgages because they have to. Rather, it’s often done to take advantage of lower interest rates, to consolidate debt or to fund home renovation projects and other big purchases. Still, there are right times and wrong times to refinance, and it pays to know the difference. Sure, it may be nice to dip into the equity on your home to fund a project, but there are drawbacks to consider as well.
So, when you can tell if it’s the right time to refinance? As long as you understand the implications of doing so, you should be able to get through the process with more benefits than drawbacks.
Before delving into the whys of refinancing, make sure you understand what it is. Refinancing a mortgage means to replace an existing home loan with a new one. Unlike a loan modification, your old loan is paid off and replaced by a new mortgage that may have different terms and even a different interest rate. As when you obtained your original mortgage, you may have to pay a variety of costs to complete the deal.
By considering the most popular reasons to refinance a mortgage, you can more easily tell whether or not it makes sense for you to do so now:
- Secure a Better Interest Rate – If your fixed-rate loan was locked in back when rates were a lot higher, you may be able to reduce your repayments by refinancing with a newer, lower rate. However, keep in mind that this may involve resetting the term of your loan, which means more repayments. In the long run, you may end up paying around the same amount of interest – or even more.
- Change the Terms of a Loan – Perhaps you’re unhappy with your variable-rate loan and want to switch to a fixed-rate loan, or maybe you’re contemplating the opposite scenario. Either way, changing the terms of your loan through refinancing can be worthwhile. Again, it depends on whether you’ll actually save money in the long run.
- Obtain a Line of Credit – If you have decent amounts of equity in your home, you may be able to refinance your mortgage to obtain a line of credit. This makes sense if you plan to stay in your home for a while. If you’re going to move in the not-too-distant future, though, you could be playing with fire and may even end up underwater on your loan.
At the end of the day, the only way to be as sure as possible about the practicality of obtaining a refinance is by sitting down with a qualified professional. Make sure to do so before putting anything like this into action.