You might not be aware of it now, but refinancing your home can provide you with a source of spendable cash. Whether you can save or earn money by refinancing your mortgage is a complicated question, and to find the answer, you should look at some of the benefits of refinancing and when you should consider it.
How can Refinancing Benefit Me?
After refinancing to a lower rate, your monthly payments will likely be lower.
Making a higher payment even with a lower rate will allow you to build up equity faster.
You can lock in a fixed rate if you’re switching from an ARM, and be secure in knowing that your mortgage payment will never change again.
Changing your mortgage term can get you a lower rate, or a lower payment cap.
It can allow you to access the equity in your home; money that can be spent in renovations, paying bills, buying a car, or financing a child’s college education.
Is Refinancing an Option?
It is, if rates are low enough and you plan to stay in your home for a sustained period of time (fifteen years or more).
Start the process by evaluating the rate you’re paying now , and compare it to the prevailing rate. If the prevailing rate is two points lower than what you’re paying, it may be a good move to refinance.
To realize the savings from a refinance, you should plan to stay in your home at least as long as the term of the new mortgage. There are upfront costs associated with a refinance, so if you plan to sell in under five years, you probably won’t be able to earn that money back.
What are the Costs Associated With a Refinance?
They are largely similar to costs associated with an original mortgage. You’ll pay for a title search, legal fees, an appraisal and a survey. You may be able to cut fees a bit by going with your original lender, but you will still have some upfront costs.
You may also have to pay points, which are a percentage of the value of your property. Unfortunately, the points aren’t tax deductible, as the IRS requires that the amount be spread over the term of the mortgage.
Your original lender isn’t obligated to renegotiate the terms of your mortgage, so you may have to pay a fee to get out of it. Even if it came with a prepayment clause, you could still end up paying thousands of dollars out-of-pocket.
When determining whether or not it’s the right time to refinance, you should carefully weigh the costs and the benefits. Every situation is unique! If you think that a refinance could be an option for you, contact an advisor who will help you assess your situation.