The coronavirus pandemic has taken a heavy toll on the U.S. economy, and while the housing market has began its recovery from the economic downturn, many homeowners may be turning to mortgage refinancing instead of selling their home.
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The good news is that now may be a better time than ever to refinance your home mortgage. National mortgage interest rates have hit a record low, making it easier to score a lower interest rate on quite possibly your largest debt. You can explore your mortgage refinance options by visiting Credible.
But just because rates are favorable, it doesn’t mean refinancing is the right step for you. Here are some good reasons to consider it, along with some reasons that should make you think twice.
The best reasons to refinance your mortgage
A mortgage refinance can serve many purposes, but here are the three that may make the most sense:
- Reduce your interest rate and monthly payments: When you replace your existing mortgage loan with a new one that has a lower interest rate, it could reduce your monthly payment and save you thousands of dollars in interest. Plus, if you replace a loan with, for example, 25 years left on it with a new 30-year loan, that will also help reduce your payment.
- Expedite the pay-off process: If you can afford a higher monthly payment and want to eliminate your mortgage debt faster, you can refinance your loan with a shorter repayment term. Combine that with a lower interest rate and you’ll stand to save a lot of time and money. Use Credible's free online tools to see what rates you qualify for today.
- Debt consolidation: With a cash-out mortgage refinance, you can tap some of your home’s equity and get cash, which you can use to pay off high-interest debt. If you do this, though, it’s critical to ensure that you can afford your new monthly mortgage payment, which may be higher than your current one. Also, take steps to avoid replacing your consolidated debt with new debt.
Worst reasons to refinance your mortgage
Depending on your current financial situation and your plans with the home, you may be interested in using a mortgage refinance loan to resolve short-term concerns. However, it may not be the best to use a long-term financial solution to do it. Here are some reasons that may not work in your favor in the long run:
- You need quick cash now: It’ll take roughly a month to refinance your mortgage loan, which won’t help you with an emergency situation. Also, refinancing can be expensive, with closing costs ranging from 2 to 6 percent of the loan amount. If you need cash fast, consider applying for a personal loan instead. You can get prequalified and compare multiple loan options by visiting Credible.
- You don’t plan to stay in the home very long: Getting a lower monthly payment can save you money, but only if you stay in the home long enough to break even on the loan’s closing costs. For example, if refinancing reduces your monthly payment by $100 and you paid $5,000 in closing costs, it’ll take 50 months for you to start seeing actual savings from the new loan. If you don’t plan to stay in your home that long, you’ll actually lose money.
- Tap your equity for non-urgent issues: A cash-out refinance can be a great way to consolidate debt, but if you want to use your equity to live beyond your means or pay for something that’s nonessential, you may ultimately regret it when you’re stuck with a higher monthly payment for the remainder of your loan.
How to decide if refinancing your mortgage is right for you
Refinancing a mortgage loan is a significant financial decision, and it’s important to understand your motivations before you start shopping around. Take some time to think about how the decision can affect you both now and in the future.
Also, run the numbers to make sure you’ll actually save money with a mortgage refinance — whether that’s through interest savings on consolidated debt or because of a reduced monthly payment.
If you’re not certain, consider consulting with a financial advisor, who can provide you with objective, expert advice on the matter. If you decide to refinance, visit Credible to compare rates and other terms from multiple banks and lenders in one place.