When is a good idea
to refinance your home?
Gone are the days
when interest rates were declining so rapidly you could literally lower
your mortgage payment from one year to the next. Several years
ago the common wisdom was that if you could lower your interest rate by
1 point you should refinance your home loan. After 17
continuous rate hikes from the Feds and interest rates climbing when to
refinance your home depends on your particular goal and personal
situation.
If you can lower your monthly payment would be great but more than
likely you will find yourself looking at a higher interest rate than
you currently have. You are going to have to look at the
big picture. If you have read some of the other pages on this
website you should know what to do.
PAY OFF HIGH
INTEREST RATE HELOC
Many folks are
holding on to a high interest rate home equity line of credit (heloc)
because they have a very good rate on their first mortgage. In
order to get rid of that high interest rate variable heloc it is
advisable to combine both into a safe 1st mortgage, even if it's at a
higher rate than your currently have. It will be
safer. A home equity line of credit is fine since there are
no typical closing costs but it comes at a price. The interest
rate is high and it is usually variable. If you can pay it off
great, hold on to your first. But if you can't pay it off and you
keep seeing the interest rise you will have to refinance it.
CREDIT IMPROVEMENT
- DEBT CONSOLIDATION
Another good reason
to refinance your home is if you have taken on too much consumer credit
and the
payments on those installment loans and credit cards
combined with the mortgage and living expenses are putting
a strain on your budget. Also, your credit score will
suffer due to the large outstanding obligations. If you
find yourself in this situation you should consider a credit
improvement / debt consolidation refinance. You should be able to
combine all the debt and lower your monthly obligations and start the
credit improvement process. A short term loan option would be a
good idea in this situation.
REDUCE LOAN TERM
If you would like
to reduce the time to pay off your mortgage and have a good interest
rate on a 30 year fixed, it does not make sense to refinance to a 15
year fixed. Simply figure out the amortization on your
current balance to pay off your loan in 15 years and start sending the
extra principal payment. Save the refinance costs and send it to
your principal balance.
ELIMINATE PMI
If you are
currently paying PMI (private mortgage insurance) and have been in your
home for a couple of years or more it makes sense to refinance to a
lower interest rate and also eliminate PMI. Some lenders have a
provision to eliminate PMI if your equity is greater than 20% but it is
usually a complicated process and the lender will fight you throughout
the process. If you are paying PMI more than likely your interest
rate is high and you would benefit from a refinance. Lower
interest rate and no PMI is definitely a good reason to refinance your
home.
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