Should You Refinance? Here's How to Determine If It’s Right For You
There are many reasons someone might consider refinancing their mortgage. For starters, refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt or even take some cash from your home’s equity to put toward bills or renovations. In addition, some home owners may want to refinance because they need to change their loan term to be longer or shorter, according to Rocket Mortgage.
A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year to lengthen the term of your loan and make a lower payment each month. Conversely, you can also refinance your mortgage in the opposite direction. When you switch from a longer-term mortgage to a shorter one, you will likely enjoy lower interest rates and you’ll also own your home sooner. Read below for some of the additional reasons you may want to refinance.
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You need cash to pay off debt
If you’ve made payments on your mortgage, you probably have equity in your home. Equity is the difference between your home’s fair market value and the amount you still owe to your lender. There are two ways to gain equity: you pay off your loan principal or your home’s value rises. As a rule of thumb, if your loan is more than five years old, you’ve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.
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If you need cash to make debt payments, a cash-out refinance may be the way to go seeing as it allows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have.
You want to do home improvements
Making an investment in your home can take many forms. For example, if you’re looking to renovate an area of your home, home improvements are a completely normal process of the home ownership experience. And using the equity in your home can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have lower interest rates than most credit cards.
You want to put more toward retirement
If you’re nearing retirement, refinancing may be a good option for you. According to Rocket Mortgage, one of the most powerful tools that you can take advantage of when it comes to saving for retirement is the principle of compounding interest. The earlier you start to invest and save, the more years you have to accumulate interest on your investments before you retire. Plus, if you have equity sitting in your home but you haven’t maxed out your annual retirement contribution limits, you may end up making more money over time by taking a cash-out refinance and investing the difference.
You want to convert an ARM to a fixed-rate mortgage
An adjustable-rate mortgage (ARM) generally offers borrowers a lower interest rate at the beginning of the loan. This allows you to take the money you’re saving and put more toward the principal to pay down the balance faster. And depending on how long you live in the home, you could be out before the rate ever adjusts. But if you’re concerned about the rate adjusting, you could always refinance your ARM into a fixed-rate mortgage, which eliminates this fluctuation in interest rate (note that ARMs only adjust periodically after the initial fixed-rate period).
Determining if it’s right for you
Deciding if you should refinance isn’t an easy decision and can’t simply be made overnight. That’s why it’s important to assess your current financial situation and consider timing to see if it’s something that aligns with your goals. Rocket Mortgage offers a refinance calculator tool that can help you get a basic idea for how a refinance could affect your monthly mortgage payment. But no matter what you decide, make sure you’re weighing your options and not rushing into your decision.
This article was created by SheKnows for Rocket Mortgage.
Quicken Loans, LLC; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. Please visit RocketMortgage.com for more information.
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