If you’re a homeowner looking for more breathing room in your budget, refinancing has probably crossed your mind once or twice. And while it may come with perks like lower mortgage payments, it isn’t best for everybody. Whether or not refinancing is a good option for you depends on your new terms.
When you refinance, you get a new mortgage to pay off your existing mortgage.People often use the term to refer to a loan or mortgage. So when you refinance your mortgage, it means you're making a few favorable changes to your terms. Think: interest rates and payment schedules.
There are a few things to think about before refinancing your mortgage:
If you refinance, you’ll have to pay closing costs again. Usually around 3-6% of your outstanding balance. Even if a lender says they offer refinancing with no closing costs, chances are you’ll still pay those costs over time because they’ll be built into your monthly payments.
If you go for a shorter-term mortgage, your monthly payment amounts will increase. Read: If you have 20 years left to pay off your mortgage, but you refinance to a 10-year term, you’ll have to pay more each month to cover the balance.
If you refinance for a longer-term mortgage, you can decrease your monthly payment amounts. But it’ll cost you interest. Hint: Adding 10 years to your mortgage term can cost you thousands in the long run.
Here's how refinancing can be beneficial:
Depending on when you purchased your home, refinancing could mean locking in a lower interest rate on your mortgage. Especially before interest rates rise again.
While it’ll add more interest in the long term, sometimes the lower monthly payments could be worth it. If it helps you reach your financial goals. Or if you need the money now
If you go with a cash-out refinance, you can turn your home equity into cash. That can add up, depending on how much equity your home has earned since you bought it.FYI: You can’t cash out more than 80% of your home’s value.
There’s no limit to the number of times you can refinance your home.(Psst…cash-out refinancing may come with a six-month waiting period before you can refinance again. Government-backed loans like VA and FHA loans might also have a waiting period.)But that doesn’t mean you should constantly refinance. Experts say you should always have your own limit in mind.
Refinancing can come with a hefty price tag.But it can also save you money, depending on the new terms. Which may help you reach big financial goals.Just make sure you have a plan in place before you go through with it.
Skimm'd By Dae Cason, Megan Beauchamp, Sagine Corrielus, Liz Knueven, Stacy Rapacon, and Alicia Valenski