Date Posted: 1/9/2021 By: Bryan Dewberry
Is It Smart to Refinance Your Home?
Refinancing involves the restructuring of your mortgage loan, meaning that you replace it with a new loan under different terms. Many people opt to refinance to reduce their interest rates or access the equity they’ve built up from their home. That equity can be used to pay off debts, perform home renovations, and more.
Pros and Cons of Refinancing
As the COVID-19 pandemic has brought record low interest rates, many are tempted to cash-in and refinancing on a whim. However, it’s important to make sure that refinancing your home is the best financial move for you.
While it should go without saying that you should not refinance your home so you can take a vacation or purchase a luxury item, here are a few scenarios where refinancing could make sense:
Additional Monthly Savings
Refinancing your mortgage with a lower interest rate can help lower your monthly payments. However, it’s important to ensure that your monthly savings offset any closing costs that come with refinancing.
The Ability to Change Your Loan Term
The option to change the term of your loan is another popular reason to refinance. If the payments are too high on your current 15-year loan, switching to a 30-year loan could help lower those monthly payments. 30-year loans with no prepayment penalties give you the option to make larger monthly payments and pay your loan off faster, should that make more financial sense in the future.
On the other hand, if you are comfortable making the payments on your 30-year loan, switching to a 15-year loan could save you a lot on interest, which is especially beneficial if you’re aiming for a mortgage-free retirement.
A cash out, or removing equity from your home, is another reason to consider refinancing. However, it’s important to make sure a cash out makes financial sense in your situation. For example, if you plan on taking $25,000 cash out of your home equity for renovations so you can live comfortably and add the value of your home, it may be worth it. But if you take out equity to pay off another debt, you need to be careful to not acquire additional debts during that process.
What Works Best For You?
At the end of the day, determining whether or not it’s a good idea to refinance will vary for every individual. While refinancing can offer great benefits, it’s important to have a complete understanding of how it impacts your financial future. Speak with a trusted loan officer to learn more about your options so you can feel confident in making the best decision for your home.