Refinancing your mortgage can allow you to take advantage of changing market conditions in order to get more favorable loan terms and cut your housing costs. But many people don't know when they should look at refinancing as an option. By picking the right time to refinance and understanding the pros and cons, you'll make a better decision.
When to consider refinancingThere are three situations in which it makes the most sense to refinance your mortgage.
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- When interest rates are falling: If you can refinance your mortgage to get a lower interest rate, you can cut your monthly payments even if the amount you owe remains the same. Those savings can add up to thousands, or even tens of thousands of dollars in interest over the life of your loan.
- To get access to your home equity: Refinancing your mortgage to increase your loan amount, known as a cash-out refinance, will free up some of the equity you have in your home. You can then use that money for other purposes, ranging from home-related improvement projects to completely unrelated expenses.
- To switch to another type of mortgage: Those who have adjustable-rate mortgages often look at refinancing as a way to switch to a fixed-rate mortgage when the interest rate environment is favorable. By doing so, borrowers can lock in low fixed rates and no longer deal with the risk of higher future costs when rates rise on an adjustable-rate mortgage.
The pros and cons of refinancingEven when conditions make it smart to consider refinancing, you won't always want to pull the trigger. Weighing the pros and cons of refinancing is crucial to making a smart decision.
- Future savings from refinancing: If you anticipate getting lower interest rates by refinancing, you can calculate exactly how much money you'll save every month by getting a current mortgage rate quote from your lender. If you're switching from an adjustable-rate mortgage to a fixed-rate mortgage, you won't be able to calculate your savings exactly, but you can still estimate your savings by projecting likely rate changes in the future.
- Upfront refinancing costs: Refinancing typically involves closing costs for items like appraisals, recording fees, and origination fees. Those costs can add up to thousands of dollars, making refinancing an expensive proposition and not something to take lightly.
- How to make the best decision: If you compare the one-time costs against the monthly savings from refinancing, you can get an idea of how long you'll need to live in your current home in order for the savings to exceed the costs. If you expect to move before you hit the breakeven point, then refinancing won't make sense. If you think you'll stay there longer, though, then refinancing is a smart move.
Refinancing can be a tough decision, given the costs involved. But in the long run, refinancing can produce huge savings while also offering other advantages of flexibility and predictability with your mortgage.
The article Should I Refinance? originally appeared on Fool.com.
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