Is it Time For You to Refinance?

Should Your Refinance?

Refinancing a home mortgage is a big decision that is not typically done on a whim. It’s important to consider all the factors that go with refinancing a home, including length of time you will be living there, which kind of refinance to choose, the interest rates, and extra costs of home ownership.

How long do you want to live in the home?

Timing and circumstance are the most important things to consider when deciding to refinance a home. This is also the first place you should start. You have to plan on being in the house for many years in order for refinancing to make sense. The national average for closing costs on $200,000 loan is $3,754. This does not even include taxes, insurance, or prepaid items. Consider how many months of lower payments it will take to recoup the closing costs of a new mortgage.

There are also many reasons you should not refinance based on timing and circumstance. If you do not plan on being in the house for two years or more, then stay in your mortgage. If you owe more on the house than it is now worth, then you might be able to refinance it under the Home Affordable Refinance Program. This is only for homeowners who are current on their mortgages. If you have had the mortgage for a long time, then refinancing is not a good choice. It will restart the amortization process, making monthly payments credited to paying interest and not buying equity. If your current mortgage has a prepayment penalty, it will increase the time it will take to break even.

Which kind of refinance is right for you?

There are two major types of refinances – cash-out and standard. In cash-out refinancing, you take out a new mortgage on the same property. The amount borrowed will be larger than the previous mortgage with the difference taken out in cash. This will have a higher interest rate because the lender has more money at risk. These are used to pay down debt. The biggest risk here is converting unsecured debt into secured debt. It can lower a credit score if you cannot afford payments. Missing a few payments can cause foreclosure.

A standard refinance is only used to replace your existing mortgage with a new one at a lower rate. Cash out is only used to cover closing costs. It offers a slightly lower interest rate than cash-out. You are also not increasing your outstanding mortgage debt.

How low are current interest rates?

Refinancing a mortgage just because the interest rate is lower is not always a good decision. The interest rates have to be really good, such as two percent or lower than your current rate, and the timing needs to be right. Many people refinance every time the interest rate drops, which reduces your overall financial benefit. You will have a long bill of closing costs every time you refinance this way.

Every situation is unique. Even if the interest rate is two percent or lower, you might be paying down discount points or have prepayment penalties that will not make refinancing beneficial. You can calculate if refinancing is right for you if you find a calculator online. You indicate your current loan numbers and the current interest rates in to see if you should refinance or stick with your loan.

What other costs do you need to consider?

There are other costs that need to be considered for refinancing. It could consolidate high interest debts while having enough equity in the home. This is another motivation to refinance. However, if you consolidate debts and then use the equity to take on more debt to do it again, refinancing is not a good option.

Another cost benefit to refinancing is protecting the home. It is a positive cost consideration since homeowners can double their investment made by refinancing. There are many ways to protect the home, all of which can be found at

The most important thing to consider when refinancing is timing and circumstance. Refinancing is only good for certain situations and all aspects of your home finances need to be considered.