How and Why to Consider Refinancing Your Mortgage

When we initially get our mortgages we think that everything will be squared away for the next 30 years. But, most of us realize at some point in time that may not be so true. This can be due to interest rates changing dramatically, your property value increasing or just plain old life changes.

So when any of these things occur, that usually sets us on the path to reconsidering our current mortgage. If you find yourself thinking about any of these topics, then you may want to consider refinancing your mortgage.

Interest Rate Changes

With the current mortgage interest rates coming in at under 4%, this might be a great time to refinance. This is especially true if your mortgage is at 4.25% or higher. However, that is just the jumping off point to consider refinancing.

When you refinance, there will inevitably be closing costs to consider. Most of us will just roll the closing costs into the new mortgage. Which sounds great because you don’t have to fork over any money out of pocket. However, that means you will be adding that amount to the total mortgage you are refinancing. Which in turn just means you are tacking on more interest every month for the life of the loan.

Sometimes this can still make sense though, depending upon how much you owe on your house and how long you plan to refinance for.

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Our Decision

We took a look into it for our own property recently. For us, it didn’t end up making sense though. We plan to pay off our mortgage in 10 – 11 years and pay more than the required amount monthly for principal. Therefore, we are paying it off at a faster rate on our own, without the cost of refinancing. We were lucky to get a good mortgage loan officer who ran through all of the numbers for us and told us that it didn’t make sense for us. Since our current mortgage rate is 4.25%, we wouldn’t end up saving any money in the long run with the closing costs being thrown in and refinancing for a 15 year term. She told us just to continue doing what we are currently doing and we will pay it off much faster without the headache of refinancing.

However, refinancing may be a good option for many others who are not paying more on their principal monthly and have a much higher interest rate. Plus, you may just get lucky and find a company that doesn’t have any closing costs. But those are few and far between and you still end up paying a bit more, even if they say there aren’t closing costs.

Property Value Increasing

If the interest rate of the mortgage isn’t what got you thinking, then it could be the property value of your home. Property values have been steadily increasing across America since the Great Recession. This is a good thing for a lot of us who already own property, as it means we could potentially have more money in our pockets at the end of the day.

It also means that it might be a good time to consider refinancing your mortgage. This is especially true if you have been wanting to make some home improvements to continue raising the property value of your home even higher.

You could potentially refinance to get a lower interest rate and use the money to get some of those home improvement projects done. When you do this, you have the capability of raising your property value even higher. Therefore, when it comes time to sell you can make a larger profit on it.

However, just remember that whatever you end up taking out to use for home improvements, you will be paying interest on. So this is where the math comes into play. Is the higher monthly mortgage going to be worth it for you in the long run? This should be based on the projections of what your new home value might be worth when the projects are all completed.

HELOC

If you aren’t sure it will be worth it, then checking into a HELOC instead of refinancing might be a better option to get to the same goal. When you take out a HELOC, you only pay interest on the money you use. So, if you aren’t using all of the money right away, you don’t have to pay any interest on it.

We chose to go this route last year instead of refinancing because it made more sense for our particular goals. And as we pay money back into the HELOC, our monthly interest rate declines to match what we still owe back into the HELOC.

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Life Changes

If neither of the previous categories have you considering a new mortgage, then it could be something else entirely. We all know that life changes on a dime sometimes. And when it does, sometimes we aren’t thoroughly prepared.

Some life changes that could occur in your world and get you thinking about refinancing your mortgage are:

  • Medical debt
  • Higher education
  • Car troubles
  • New baby
  • New business

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If any of these aforementioned items should pop up unexpectedly, then refinancing might be a viable option. This will depend upon the interest rate and closing costs, of course. But, in a lot of cases the interest rate for your mortgage will be a lot lower than what you would pay elsewhere. This is especially true of personal loans.

I know that for us, we considered refinancing to help fund a new business. Ultimately, we went the HELOC route instead. It was easier from an accounting standpoint and we only paid interest on what we needed. But, refinancing and using the money to do whatever you need, might be a great option too. No matter what, how much you can get will still come down to what your property value is worth.

In most cases, you can refinance your mortgage for the full amount it is worth and take out the difference between what you currently owe and what the new mortgage is. But, with a HELOC, you can only take out a certain percentage of what the full property value is. So you may be able to get more cash in hand with the refinance option.

Should You Refinance Your Mortgage

Ultimately, now could be a really good time to consider refinancing your mortgage because interest rates are pretty low. Plus, you might be able to find a company that won’t charge you closing costs to refinance, which could help.

If you want to increase your property’s overall value, then this may also be a great time to refinance. Using the money from the refinance to increase your property value can potentially benefit you greatly in the future when you sell the property.

Or, you could just use the money to help pay for some of life’s surprises. When this is the case, the extra money in hand can help you breathe a bit easier.

Overall, you want to make sure you shop around and run the numbers to make sure refinancing makes the most sense for you first. And if it does, then go ahead and pull the trigger while the rates are still pretty darn low.

Have you considered refinancing your mortgage now? If so, what prompted you and what do you plan to do with the extra cash?