Refinancing your mortgage to one with better rates could save you a whole lot of money. However, if you refinance to a new loan for the wrong reasons, you could end up making an expensive mistake. Let’s take a look at a few right and wrong reasons to refinance your mortgage.
When You Should Consider Refinancing
- Debt consolidation: If you are repaying several high-interest debts that are eating into your disposable income, you could refinance your mortgage and repay at least a few of your debts with it.
- Moving from an adjustable-rate mortgage to a fixed-rate mortgage: If you are paying a higher-than-average rate on your adjustable-rate mortgage, you could refinance to a fixed-rate mortgage.
- To secure a low-interest rate: If you find a new loan with a lower rate of interest and lifetime interest cost, it’s a good idea to refinance.
- To opt for a loan with a shorter tenure: A loan with a shorter term can help you save significantly on interest. So, if you are able to afford the increased monthly payments, you should consider refinancing your loan.
When You Should Not Consider Refinancing
- To pay for luxury purchases: It’s a bad idea to tap into the equity in your home solely to pay for luxury purchases or a vacation. Keep in mind that if you aren’t able to repay your loan, the lender could initiate foreclosure proceedings.
- To repay your loan faster when you aren’t financially secure yet: Don’t refinance to a new loan with a shorter term until you’ve repaid your high-interest debts and have enough savings in your emergency fund.
- You plan to sell your home soon: Refinancing your loan will include certain costs. So, if you intend to sell your home soon after refinancing to a new loan, you may actually lose money. Refinancing is best-suited for individuals who will stay in their homes for a long time.
To ensure you refinance to a new mortgage loan with a competitive rate, make sure to do your research and compare different loans. Once you find a loan offer that suits your needs, consider applying for pre-approval and locking the interest rate, before you begin the application process.