Is Refinancing a Good Idea?
If you’re ready to do some math, you can determine fairly easily whether refinancing is right for you. The main goal of any refinance is to save you money.
- Rates – obviously you want to refinance to a lower rate than the one you’re currently paying. Refinancing to get out of a variable interest for a fixed rate is also a good goal to have, especially if you can lock in a lower rate. In most cases, finding a rate at least 1 percent lower or more can make it worthwhile.
- Term – Make sure you’re not just getting another longer loan at a lower rate. If you’re trading in 15 years left for a new 20-year mortgage you might not be saving a whole lot of money even with a lower rate.
- Break-Even Point – Determine how much you’ll save each month by cutting your rate, but remember to factor in the closing costs. Divide the monthly savings into the closing costs to see how many months until you’ll actually be saving money. If you don’t have that much time, you can take a higher rate to reduce your closing costs if that higher rate would still save you money in the short term.
- Comparison Shop – Rates change, lenders value different things and it pays to do as much research as you can before refinancing. You don’t have to use your neighborhood bank if there are plenty of other options available.
In your quest for refinancing, make sure you aren’t looking at home equity loans, which add to your overall debt and don’t refinance your mortgage in any way. Home equity loans are most often used to cover other debts or to pay for things which should come out of savings and not borrowed. Taking out a new loan to cover other debt isn’t a smart idea and taking out a loan for vacations, home renovations or other big-ticket items based on the equity in your home is just as bad. Saving money for those needs or wants is the best way to plan for those expenses.
If you want to get a handle on your debt, our financial consultants can walk you through where you are currently and help you create a plan to pay down your debt. Your free debt analysis can help put you on a path to homeownership and paying off your mortgage quicker.
A 30-year mortgage sounds like a long time, even if you’re able to refinance to 15 years after a short time that’s still a long while. Most people don’t know that it takes over 22 years on a 30 year conventional mortgage just to pay off half the loan. Paying off your mortgage faster than the term relies on finding extra money to put towards your mortgage.
- Round your bill up to the next $10, $25 or $50 mark, so if your payment is $871, you pay either $880 or $900 each month.
- You can also pay half your monthly mortgage bill every two weeks, which leads to an entire extra mortgage payment each year.
- Make an extra payment each year, whether through a bonus or by finding a little money each month
In order to find the extra money to pay off your mortgage quicker, create a budget with Mvelopes and carve out that buffer that you can add to your mortgage payment to save thousands on interest over the shortened life of your loan. Keep rolling newfound money into paying off your mortgage and you can make 30 years go by in 12 or 15.
At first, your mortgage payment may consist of principal, interest and mortgage insurance. Ways to decrease that payment include having a down payment of at least 20 percent of the home’s purchase price in order to avoid the mortgage insurance. In some cases it takes up to 20 years to really make a dent in the principal because of the amount of interest involved in a 30-year mortgage.
Finding ways to put more money into your mortgage will allow you to get to that principal faster and help speed up paying off your mortgage.