When it comes to debt, it’s easy to feel trapped. Maybe you’re already on a tight budget. Maybe you’re already trying to reduce spending and build savings. But you’re still stuck with mounting payments that you can’t make. For some people, refinancing might be an option.
Refinancing your home loan is just a fancy way to say that you'd like a new (and possibly better) mortgage payment. When you refinance your loan for a lower monthly payment, you can free up cash to help pay off other debts.
It sounds simple, but there are many things to consider. Use this article as your refinancing starting place and get ready to consider these three factors before you take next steps:
- Goals
- Risks
- Planned savings
Set your refi goals
People refinance for many different reasons. Determine your refi goals by answering the questions below:
- Do you want a lower interest rate?
- Do you want to reduce your monthly payment?
- Are you planning to consolidate your debts? (home equity loan, high-interest credit cards)
- Is it time to stop paying private mortgage insurance (see below)?
- Do you want a 15-year mortgage? Are you ready for a 10-year mortgage?
Perhaps you want a fixed-rate mortgage or an adjustable rate mortgage (ARM)?
Know the risks
Refinancing your home does come with risk. Not everyone looking to lower their interest payment will find success with refinancing. Discover some scenarios where you may want to avoid refinancing:
- If your breakeven point is too long.
- If the long-term savings aren't significant.
- If you can't afford the closing costs and are considering wrapping them into your monthly payment.
- If moving to an adjustable rate mortgage puts you at risk when your payment increases.
Plan for potential savings
How long will it take to break even on a mortgage refinance? That depends on a multitude of factors including your current interest rate, the new potential rate, closing costs and how long you plan to stay in your home. Use a refi