There comes a time in the life of every homeowner when they have to make a decision about whether to refinance or not. Refinancing a home is a big decision because you have to take another loan out all over again. Refinancing is a smart financial move in some circumstances because it can actually help you to save money and eliminate debts. The key is to know when it’s the right time for a refinancing decision and when it’s the wrong time.
Lower Interest Rates
One of the key signs that it is time to refinance your home loan is when interest rates have dropped substantially from your original loan amount. Let’s assume you financed your home originally at an 8% interest rate. That rate may have been fine for the early 2000’s but interest has dropped substantially since then. Since you can now get a loan with a 4% interest rate, it would be a smart move to refinance your existing loan. You could save some money on your monthly payment while cutting your monthly interest payments in half.
Better Loan Terms
A 30 year mortgage seems like a good option when you first purchase a home because it allows you to get in the house that you always wanted. After a few years in your home, you may decide that you want to pay your balance off a lot quicker. One of the ways to do this is by refinancing your loan and taking a shorter loan term. A 15 year mortgage for example will increase your mortgage payment but reduce your mortgage years. You will pay more money on a monthly basis but save hundreds of thousands of dollars in interest over the life of your loan. You will also eliminate your biggest debt in a shorter time period.
Changing The Loan Type
A lot of people got stuck with adjustable rate mortgages earlier in the decade. These mortgages had very low teaser rates that allowed people to buy more house than they could afford. After a few years however the interest rate readjusts and your mortgage payment will balloon. If you have an adjustable rate loan that is readjusting to a much higher rate then it is smart to consider refinancing. Changing from an adjustable rate mortgage to a fixed rate mortgage will save you some cash and give you some predictability as to what your mortgage payment will be.
If you have never refinanced your home before then you may be surprised at the amount of equity that you can take out via home loans. Tapping into the equity in your home is not a bad idea if you use the money to send the kids to college, improve the house, or pay off some long standing high interest debt. It makes sense to take $30,000 in equity out of your home at a 4 or 5% rate to pay off $30,000 in credit cad debt at a 29% interest rate. You can repay the money borrowed faster and get yourself out of debt at a quicker rate.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.