The Two Good Reasons You Should Refinance Your Home This YearA refinance replaces your current mortgage with a new mortgage on different terms. Hopefully these new terms are more financially advantageous to you than the terms of your previous loan. If not, you should reconsider whether a refinance is the right choice. There are good reasons and bad reasons to refinance. Many borrowers stress out over when to refinance and forget to consider why they’re choosing to do so in the first place. Let us ease your anxiety. Right now is a good time to refinance. Mortgage rates are still lower than they’ve been for much of the past fifty years. There. We said it. Now start thinking about why you want to take on a fresh mortgage. You might be surprised to learn that some popular reasons don’t offer much financial benefit. Five Bad Reasons to Refinance 1. Don’t refinance to extend your loan term. This is rarely a wise idea. If you’re halfway through a 30 year mortgage, don’t take out a new 30 year mortgage. You’ll have more time in which to pay off your loan, but this decision can have devastating financial and personal consequences. Interest is not cheap. It never is. The longer your loan lasts, the more interest you’ll have to pay. If you’re refinancing solely to give yourself more time to pay back your debts, you’re likely costing yourself tens of thousands of dollars in additional interest payments. And do you want to be paying off your mortgage when you’re 70? Plan for the future. An extended loan term has its uses, but it’s not worth the cost in the long run. 2. Don’t refinance to lower your monthly payment. As with the previous point, a refinance for this purpose won’t save you money in the long run. A lower payment now may create negative financial side effects down the road. If you can’t handle your monthly mortgage payment, try to develop a new budget first. Try to cut expenses. A refinance is not the best solution to a budget problem. 3. Don’t refinance to make home improvements. Home improvements are a great idea if you’re planning to sell the home or you want to increase the value of your investment, but weigh the costs. The interest you’ll pay on the cash you take out through your refi may overshadow the increase in value you’ll obtain by adding an additional bedroom. You may need to renovate or add onto your home for family reasons. A refinance can be a good source of capital for a project of this variety. But whatever you do, don’t use a refinance to improve your home simply for comfort’s sake. Investigate other ways to adjust your lifestyle without deepening the financial strain of your mortgage. 4. Don’t refinance to fund miscellaneous expenses. Don’t use your home to finance your lifestyle. Don’t take cash out of your home to purchase a car or take a nice vacation. It won’t be worth it in the long run. Your home is an investment. The money stored in this investment will appreciate over time and build additional wealth for you. Don’t withdraw funds from this portfolio and put them into short-term expenses or depreciable goods. You’re shooting yourself in the foot. 5. Don’t refinance to pay off other debts. As mentioned in the previous point, your home is an investment. Don’t pull funds from your home to pay off other debts unless it makes clear financial sense to do so. The Two Good Reasons You Should Refinance 1. Refinance to pay your home off faster. If you can refinance into a loan that will save you money in the long run, go for it. Most of the time, this means getting a shorter term length and a lower interest rate. This isn’t hard to do right now, with rates as low as they are. Try to secure a 15 year fixed rate mortgage at the lowest rate available in your area. 2. Refinance to get a fixed rate loan. If you’re one of the few homeowners still stuck in an adjustable rate mortgage after last year’s low fixed rate decrease, jump on the bandwagon as soon as you can. Fixed rate loans are still incredibly low, though they’ve fluctuated a bit in recent weeks. Get out of your ARM before the market recovers and stabilize your debt. |
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