Is it Worth it to Refinance Your Home Loan?

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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.

Debt Consolidation

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.

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Money

Derek

AUTHOR Derek

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.

13 Comments

    • Haha. Yes that IS good news! Time to pay off the balance! 🙂

  1. You just need to be careful with the debt part, do this a few times and next thing you know you a heck of a lot more than your original mortgage.

    • Good point DebtTips. If all of the numbers don’t add up and won’t save you money, walk away from the refi!

  2. If I could now get a loan at 4%, it would probably be worth while to try to refinance for me. My worry is that I may not be as qualified for a loan now as I was when I originally got my mortgage, due to certain status/financial changes, so going through the loan process again with the chance of being turned down (or not getting the lowest rate) seems a bit daunting. My goal is more to pay it off as quickly as possible at this point.
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    • Max, it sounds like you may as well at least test the waters with a refi, especially if your current rate is 6% or more. It’s worth a shot right? Just don’t give them any of your money until you know it’s going to be worth it.

      • Hey Derek, My current rate is actually at 5.125% for a 30-year mortgage, which I don’t think is too bad, but if I could get it to around 4% or even get a 15-year mortgage for less, then yes, I do think it may be worth testing the waters and seeing what type of rate I might qualify for. I may shoot my banker an email to see how their rates look right now, as I’d really like to stay with my same local bank, because they don’t sell their mortgages to other institutions like some banks might, so I at least have that stability with them.
        Max recently posted..American Express Card Points for Charity Promotion and AMEX Credit Card Referral Rewards

    • Haha! Wow, the interest rates have really gone down since your first home purchase! Good luck with the refi. Based on the numbers, it looks like it might be worth it to go through with it. Plus, you’ll be done with your loan in 10 years! Bonus! 🙂

  3. I called my bank a few weeks ago to refinance again to a 15 year with a lower rate, but with our good standing we were able to do a loan modification. It was a simple process with little paperwork and less cost than a refinance.

    I had always thought that a loan modification was for someone who was in trouble with their mortgage, but I was was happy we were able to take advantage of it. Our mortage is through a small bank where we also hold some savings & checking accounts, it may have just been a benefit of working with a small community bank.

    • Nice work Heather! Guess it helps to be in good standing with the bank, huh?

  4. I’m 3 weeks away from re-finacing my house currently for 4.0% and I’m getting a rate for 3.875 last minute.
    APR 4.43 vs 4.23….is it worth it drop the lender or quickly close and change lenders right away?

    How much will I save by 12.5 basis points over 30 years?


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