Reasons and Methods for Refinancing Your Mortgage

Considering refinancing your mortgage? Here are some questions to ask | Loan Studio

When we first get our mortgages, we often assume everything will be set for the next 30 years. However, many of us realize at some point that this isn’t always the case. Factors like significant interest rate changes, an increase in property value, or life changes can prompt us to reconsider our current mortgage.

When any of these situations arise, it usually leads us to think about refinancing. If you’re contemplating these factors, refinancing might be worth considering.

Interest Rate Changes

With current mortgage rates below 4%, it could be an opportune moment to refinance, especially if your rate is 4.25% or higher. However, it’s essential to consider closing costs, which many people add to their new mortgage. This can increase your total loan amount and, consequently, the interest you’ll pay over time. Refinancing can still make sense depending on your outstanding loan balance and the length of your new loan.

Our Decision

We recently evaluated refinancing for our property. Since we plan to pay off our mortgage in 10-11 years by paying more than the required principal each month, refinancing didn’t make sense for us. Our mortgage officer confirmed that with our current rate of 4.25%, including closing costs in a 15-year refinance wouldn’t save us money. We were advised to continue with our current payment strategy to pay off the loan faster without the hassle of refinancing.

Refinancing might be a good option for others who aren’t paying extra on their principal monthly and have a higher interest rate. You might also find a lender with no closing costs, although such offers are rare.

Property Value Increasing

If interest rates aren’t your main concern, rising property values might be. Since the Great Recession, property values have been climbing across the U.S., benefiting many homeowners. This increase in value could be a reason to consider refinancing, especially if you’re looking to make home improvements that could boost your property’s worth even further.

Refinancing can provide funds for these projects and potentially lower your interest rate. However, remember that you’ll pay interest on any funds borrowed for improvements, so calculate whether the increased monthly mortgage is worth it based on your projected home value after the upgrades.

HELOC

If refinancing doesn’t seem worthwhile, a Home Equity Line of Credit (HELOC) might be a better option. With a HELOC, you only pay interest on the money you use. This flexibility can be advantageous if you don’t need the full amount immediately. We chose this route last year for our goals, and as we repay the HELOC, our monthly interest decreases in line with what we owe.

Life Changes

If neither interest rate changes nor property value increases are motivating you, life events might be. Unexpected changes like medical debt, higher education costs, car troubles, a new baby, or starting a new business can prompt refinancing considerations. Refinancing might offer a lower interest rate compared to personal loans. For our new business, we opted for a HELOC for easier accounting and interest-only on needed funds, but refinancing could also be beneficial depending on your circumstances and property value.

Should You Refinance Your Mortgage?

With low interest rates, now could be a good time to refinance. Finding a lender with no closing costs could further sweeten the deal. Refinancing might help increase your property’s value or provide funds for life’s unexpected expenses. Always shop around and crunch the numbers to ensure refinancing makes sense for you. If it does, take advantage of the favorable rates while they last.

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