In life, there is a time and a place for everything. In the real estate market, especially when you are refinancing, the same rules apply. Refinancing can swing two ways. It can either be a smart financial move, saving you thousands of dollars, or it can be a terrible financial move where you end up paying thousands more than you would have. In today’s market, we are dealing with historically low-interest rates, which means that the refinance is highly appealing for homeowners. But don’t sign on a low refinance rate just yet. Before you do, there are a few things you should know.
When do Low Refinance Rates Benefit me
Typically speaking, a refinance is most beneficial when it’s done within the first few years of a loan simply because you haven’t paid down a lot of the principle yet. Most of the time homeowners look to refinance so they can lower the interest rate, which, of course, is ideal for today’s market. But they refinance for other reasons as well. Some homeowners want to consolidate debt or cash out their equity. Others want to adjust the terms of the loan; this can include shortening or lengthening the loan, reducing mortgage payments, or switching the loan type.
A home is an investment. When you refinance you can leverage that investment and use it for other things, especially if you’ve built up a little bit of equity. For many homeowners, the idea of using their equity to consolidate their debt is very appealing. To make the package even better, with the rates today as they are, all of your debts can be consolidated into a very low-interest rate. You can potentially save thousands. In addition to this, equity can be pulled from the home and used for other investments; when done correctly you can use your home to further your investment portfolio, setting yourself up for a better future.
As far as the loan terms go, if you’re struggling to make ends meet, pushing out the loan length a few more years to reduce the mortgage payment can be really helpful. It may not save you money in the long run, but it could be the key to your predicament in the short term. On the flip side, you may be able to shorten the loan term, securing a low-interest rate while making it possible to pay the loan off sooner. This strategy often saves thousands. And while you’re there, securing a fixed loan isn’t a bad idea either. It’s much less risky than an adjustable rate loan, which is frequently used by homeowners to secure the initial loan.
When Are Refinance Rates a “No Go”
With refinance rates as low as they are, you really should be looking into refinancing to see if it will be worth your time and money. So there are a few scenarios where refinancing won’t benefit you. First, if you’ve owned your home for a significant amount of time. With a home mortgage amortization schedule, you pay more for the interest during the first few years, and then eventually you end up paying more on the principle. If you’ve been in your home for ten or fifteen years, you’ve gotten to where you are paying a fair amount of principle. Plus, you have equity. When you refinance, the amortization schedule restarts and you are back to square one, paying more on interest every month than principle. In addition to this, unless you get a ten or fifteen-year loan term, you sign yourself back into a thirty-year agreement. Thirty years added to the ten or fifteen you’ve already paid on the loan means you’ll be paying on your mortgage for more than forty years. So that’s something to watch for.
It’s also important to know that all refinances require a hefty sum up front before completing the loan. Your initial investment will be in the thousands and over time when the refinance is properly completed this will pay itself back, but there are plenty of cases where this isn’t the case. So be sure to do all of your calculations, so you know if and when the refinance will start to pay for itself.
There are many great reasons to take advantage of the refinance rates today, and there are many great reasons not to. As a homeowner, you’ll want to make sure you do your homework and get all of your questions answered before you lock yourself into a loan that may end up doing you more harm than good.