If you are in a situation where your mortgage has been eating a large sum of your monthly income, then refinancing it can be a way out. You possibly were in dire need when you opted for it in the first place, irrespective of the higher interest rate. If you find interest rates plummeting in the next few years, you should seriously consider this option. However, this comes with its own share of cons, hence, if you are not vigilant, you may not derive a great deal out of this or worse, you may find yourself in a financially critical situation.
As a result of mortgage payments, if you are left with little or no money to take care of your other needs, you should consider a lower interest remortgage. This means you will have to pay less towards your monthly installments. The balance amount can be used for your other expenses. Some people consider refinancing to pull out the equity; however, this is not always a wise option. Though, you could get some fast cash, you risk losing your house in case you fail to repay in the future.
Remember, do not rush for refinancing as soon as you see plummeting interest rates, as it comes with closing fees and additional expenses. Even the refinance with no closing cost includes some sort of fees (known by a different name). Hence, you may not truly benefit, if you refinance your mortgage within a fraction of the original loan rate. It is recommended that you wait until you get at least a 2% decrease in interest rates.
Is it a Good Idea to Refinance to a Lower Term?
If your original pay off plan is for 30 years, refinancing it to a 15 or a 10 year payoff plan is indeed a very good idea. Although, a longer time span means you have to pay less every month, you actually end up paying a lot more in the long run. The interest amount incurred on your loan increases with every passing year. By opting for a shorter duration plan, you cut your interest amount by a great deal. Hence, even though you might have to shell out a few extra dollars every month, you will become debt-free in lesser time than you actually estimated. In short, refinancing your mortgage for a lower term is always a good idea. However, make sure you have the means to cover the additional expenses.
Adjustable Rate Mortgage (ARM)
This essentially means you will end up paying a higher interest rate at some point in time, as the rate is adjustable. Therefore, make it a point to lock in the lower interest rates. Never refinance for an ARM, even if your current rate is less than perfect.
While signing a contract, check if the interest rate, in the quote and the contract, is the same. If possible, get the refinancing done from the previous lender, as it helps to reduce the tedious paperwork.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.