When Refinancing Makes Sense, and When it Doesn’t

If yIs Refinancing Right for me?ou’re a homeowner with a mortgage, you have probably heard about refinancing. While refinancing can help you to save money over time in some situations, and may be a smart financial move, it’s important that you understand what refinancing is and when it makes sense (and when it doesn’t).

What Is Refinancing?

Refinancing is the act of paying off your current mortgage by taking out a new loan. Typically, the new loan is taken out at a lower interest rate.

Why Do People Refinance?

People choose to refinance for a number of reasons:

  • To secure a lower interest rate. A person who is on an ARM mortgage may choose to refinance when the locked-in interest rate period has expired. Or, refinancing may make sense if you can secure a lower interest rate for another reason.
  • To free up some cash. This is the case when people have built up some equity in their home, and want to use some of it to pay off another loan or make a large purchase.
  • To make a mortgage more affordable. A person who is unable to make monthly payments on a 10, 15, or 20-year loan may see if they can refinance to a 30-year loan, which would lower monthly payments.

If you can secure a lower interest rate by refinancing, you may be able to save thousands of dollars over time. According to a certified financial planner quoted in TIME, refinancing for a better interest rate makes sense if you can cut your interest rate by at least half of a percent.

What Are the Downsides to Refinancing?

While refinancing can have some benefits, it’s not always in your best interest. For example, when you refinance, you incur a number of fees associated with the refinance process – depending on who you refinance through. A few of these fees might include: appraisal fees, lawyers’ fees, and bank fees. If you want to pay down your mortgage using your home equity credit, you may be penalized for this. Some lenders will charge homeowners fees for using home equity credit to pay down a mortgage.

Should I Refinance?

If you want to save more money over time and are confident that you can secure a lower interest rate, or if you are currently unable to make payments on your current loan, then refinancing may be for you. However, don’t get too focused on just interest rates. Loan terms, fees and fines, the value of your home, your credit, and your current income are all important considerations, too. In most cases, it is best to speak with a financial professional who can guide you through everything you need to know.

At Hayden Homes, we’re here to help you make smart financial decisions that will benefit you through your new home purchasing process. We partner with a Preferred Lender, and communicate with them throughout the entire loan process. If you are interested in purchasing a new home and have questions about financing, we, together with our Preferred Lender, are here to help you.