Chances are the home you live in is the most significant asset you own, and the most important purchase you have ever made. Whether you live in a humble cottage or an impressive mansion, the roof over your head plays a huge role in your life, not only emotionally but financially as well.
Your home is a valuable investment, but the importance of your home is often overshadowed by the impact of your mortgage. For most people, the monthly mortgage payment is the biggest check they write, and the size of that check will make a huge difference in every other budgetary decision.
One way to reduce the size of that monthly check is refinancing your mortgage, but how do you know when the time is right? What factors will influence this important decision, and what should you do to improve your financial standing and keep more cash in your pocket? Here are five times you should refinance your mortgage - and one time you should avoid it.
#1. Interest Rates Have Fallen
The most obvious reason to refinance your mortgage is to get a lower interest rate. When interest rates are falling, refinancing an existing mortgage becomes extremely attractive, and the further rates fall the more enticing the idea.
If interest rates have fallen substantially since you first bought your home, you should definitely check into the refinancing offers for which you may qualify. Even if you face some closing costs, refinancing into a loan with a lower interest rate could make financial sense.
#2. You Have Improved Your Credit Score
You should also consider a mortgage refinancing if your credit score has improved since you moved in. If your credit score was not in the top tier range, the interest rate you are paying could be higher than it needs to be.
If you have worked hard to improve your credit score, now is the time to reap your reward. Now that your credit score is in the top range, you will probably qualify for the lowest interest rates available, and that could save you a substantial amount of money.
#3. Your Home Has Increased in Value
Your home is more than just a place to live; it is an investment in the future. Owning a home can be a great way to build wealth for the long term, and hopefully your property will increase in value as time goes by.
If your home has increased in value already, refinancing your mortgage could allow you to free up some of that equity and get better loan terms in the process. You can check your estimated home value online to see where you stand, and if refinancing is in the cards you can follow up with a formal appraisal to seal the deal.
#4. You Want to Shorten the Length of Your Mortgage
If the idea of writing mortgage payment checks for the next three decades is keeping you up at night, why not refinance into a shorter term? If interest rates have fallen substantially since you bought your home, you may be able to refinance into a 15 year mortgage without a meaningful increase in monthly payments.
Even if your new payment is somewhat higher, you may be able to make the 15 year plan work. If you are willing to tighten your budget in other ways, you could end up owning your home free and clear way ahead of schedule.
#5. You Have Other Debts to Pay
The mortgage on your home is probably your biggest debt obligation, but it may not be the only one. If you are struggling to pay off credit cards and other high interest debt, a mortgage refinance could be the perfect solution.
Refinancing your existing mortgage and freeing up some of your accumulated equity can be a smart idea. You can use those funds to pay off your credit cards and get rid of those high interest rates once and for all.
When not to Refinance
As you can see, refinancing your mortgage can be a very smart financial move, but it is not always the right choice. If you plan to move within the next couple of years, even a substantially lower interest rate may not be enough to seal the deal.
There are costs associated with refinancing a mortgage, including closing costs, appraisal expenses and more. If you are planning to sell in the near future, your time and energy could be better spent shopping for an affordably priced home while simultaneously making some strategic upgrades to your existing property.
Your home is your castle, and you want to protect it and the rest of your finances. If you want to enjoy your home without worry, refinancing your mortgage could be the right move, especially if you are willing to do the work and learn the ins and outs of the process.