When the numbers add up, refinancing your home can be a smart financial move. It involves paying off your existing mortgage with a new one, which ideally provides better terms. The most common reason for refinancing is to grab a lower interest rate, which can lower your monthly payments, the total interest you’ll pay over the life of the loan, or both. You might also refinance to shorten your loan term, trade an adjustable-rate mortgage (ARM) for a fixed-rate mortgage, or access home equity.
Then comes the work: you check out other loan offers, see what interest rate you qualify for, and calculate how much refinancing will cost. These days, that’s a lot, since you might have to pay closing costs (for the title company and other services), an appraisal fee, and points (prepaying interest). All told, you could end up spending $3,000 or more. If you’re planning on living in your home a long time, refinancing can be worth it. Otherwise, it might not be.
A related issue is the pay-back period, which is the time it will take for your monthly saving to equal the cost of refinancing. For example, if the refinancing will save you $200 a month and the closing costs are $4,000, you will recover the cost in 20 months.
Lastly, make sure your new mortgage fit into your financial objectives. A shorter loan term can mean higher monthly payments, but that will also generate equity faster and save you money in interest over time. A longer loan term can make for lower payments, but you will have to pay more over time in interest. A mortgage advisor can help you decide if refinancing is right for you in light of all this.
