Money is the number one stressor in the United States, and a big part of that stress is mortgage expenses. While refinancing your mortgage—replacing your current mortgage with a new one—can save you thousands of dollars, eliminate years of high interest rates, and alleviate much of that stress, it may not always be the right decision. Here are some factors you should consider before calling your mortgage lender.
1) Why You Want to Refinance
People refinance mortgages for a lot of reasons, and they are not all equally sound. If, for example, you want to change an adjustable-rate mortgage to a fixed-rate mortgage or take advantage of a lower interest rate, you might be headed in the right direction. However, if you are refinancing to consolidate debt, you may want to pause. While consolidating all your debt into one payment may make your life easier in the short run, it may not fix the root of your problem. For instance, if you have bad spending habits, you will want to fix those first. Analyze why you want to refinance and make sure that you are, in fact, making the smart decision for your personal situation.
2) What Your New Interest Rate Will Be
Interest rates are set using a variety of factors, and figuring out where you stand can be tricky. There is a flat interest rate that the federal reserve updates every few months, and the fluctuations can be good or bad. If you have a good credit score, have collateral that you can offer, or can afford to make a higher down payment, you can secure a better loan because you are a less risky candidate. These factors, along with many others, help banks determine whether you are a worthwhile investment, and the rate you get determines your mortgage payment for the next 10-30 years.
3) How Long It Will Take for You to Break Even
There are immediate financial costs to refinancing your mortgage that can run into the thousands of dollars, including appraisal fees, paying a loan officer, and other miscellaneous charges, so you need to know how long it will take to make that money back. If you spend $5,000 to change your mortgage but only save $80 a month, it could take you over six years to break even. On the flipside, a $2,000 payment for saving $200 a month on your mortgage payments may result in breaking even by the end of the year. Depending on what your immediate financial needs are and how you refinance, you could hurt or help yourself significantly.
4) Your Financial Goals and Needs
Can you afford to spend $5,000 to cover refinancing costs? Do you want lower monthly payments and more money in your pocket even if it means having a longer mortgage with a higher total cost? Do you want to get rid of your mortgage as quickly as possible? Do you think you can get a lower monthly payment and a shorter mortgage? How’s your credit score? Can you raise it in the near future? Refinancing your mortgage is a big financial decision, so it’s important to understand both your current financial situation and your future goals. Look carefully at where you are and where you are headed over the next five years before jumping into anything that may be risky.
If you need more information, our website has more information on mortgages.