There are many scenarios in which it makes sense to refinance a home. The first reason a homeowner might choose to refinance their loan is to lower their fixed mortgage rate. Typically, it pays to refinance if the market rates are 2 percentage points lower than your current locked in rate. However, many homeowners choose to refinance even if the difference is only 1.25 – 1.5%. If you choose this option, you’ll just need to weigh the associated fees and costs of the refinance to ensure it makes financial sense.
Another typical refinance scenario exists when the homeowner has an adjustable rate mortgage. Many homeowners take out ARMs when purchasing a home because the lower rate for the specific amount of time is very appealing. However, once this period of time is over, the ARM will fluctuate based on the market rate. So the homeowner assumes the risk of the rate going up or down at that time. Because of this, many homeowners with this type of loan decide to refinance to a fixed mortgage prior to the end of the ARM’s introductory period, allowing for a set payment for the life of the loan.
A third scenario exists when a homeowner wants to build equity in their home quickly, so they can fully own the home sooner and eliminate a mortgage payment altogether. Refinancing to a shorter termed mortgage will create this equity at a much faster pace. It’s important to understand this means much higher monthly payments through, so if this is an option for you, you’ll want to ensure you can afford the higher payment on top of your other expenses.
A last refinance scenario is when a homeowner has an exotic mortgage type such as a balloon mortgage. You can refinance before the larger spiked payments come due and pass the debt down to your future self.
Refinancing can be a great idea depending on how and when you decide to do it. Before you apply, you’ll want to speak with a lending institution representative to understand if a refinance would make sense for your specific financial situation.