Refinancing is a serious decision, and one that is generally not free. In most cases, those who refinance their mortgage will need to pay closing costs that range from 2% to 5%. Even with this in mind, there are times refinancing still makes good financial sense. Situations that support a decision to refinance can include:
- Lower interest rate. It is often beneficial if you can get a lower interest rate for your mortgage.
- Shorter term. In some situations, it is also helpful to decrease the term of the mortgage. This can reduce the amount that you end up paying in interest over the course of the loan.
- Fixed rate. Those who initially agreed to an adjustable-rate mortgage may want to reconsider. This can mean the rate jumps towards the end of the mortgage term. If possible, it can help to change to a fixed rate plan if you get a favorable rate.
- Home equity. Those who have seen their home values increase can tap into this capital without selling their home through refinancing.
It is important to note that as of this writing interest rates are averaging 7%. This means that for most homeowners, the time is not yet right to refinance. However, financial experts estimate that although refinancing at this time is not advantageous for most homeowners there are still over 200,000 who can benefit. These include those who are currently paying mortgage rates set at over 6.58% and can lower their rate by 0.5% or more. Traditional advice was to wait for at least 1% lower rate, but things have changed. In some cases, saving as low as 0.5% can mean big savings over the life of the mortgage so don’t rule it out. Run the numbers and see if it makes sense in your situation.