What to Know before Refinancing

Refinancing your existing mortgage is a big financial move. There are a number of factors that go into such an important financial decision. Done correctly, refinancing can save you money and free up cash to put toward home improvement projects and other expenses. Before you refinance your home, however, consider your goals. Examining every angle can help you make a smarter decision on what may be the biggest investment of your life.

Managing Debt

One of the most important considerations for refinancing is how you intend to use any extra money. If you want to access your equity for a home improvement project consider a home equity line of credit. Examine the terms and interest rates for both refinance loans and home equity lines before making a decision. If you want to refinance to consolidate your debt, rolling all your existing obligations into one lower monthly payment makes good financial sense if you are dedicated enough to avoid incurring new debt.

Break-Even Analysis

In the home loan industry, the so-called “break-even point” refers to how long it takes for your interest savings to cover the cost of refinancing your home. To make the refinance worthwhile, you must plan to remain in your home past this break-even period. According to the majority of loan experts, most homeowners reach their break-even point within three years. Embrace Home Loans processes refinance loans in just three simple steps. A mortgage specialist will help you calculate the break-even period to determine whether refinancing will work for you.

Fixed vs. Adjustable Interest Rates

Many homeowners refinance to eliminate the risk of an adjustable rate mortgage, commonly referred to as an ARM. When interest rates are historically low, it generally makes sense to opt for a fixed rate.

In some cases, however, homeowners choose to refinance to an ARM, which might offer an interest rate that is initially lower than a fixed rate mortgage. Individuals who often relocate for work and know they will need to sell at a certain point in the future can take advantage of the lower rates offered by ARMs.

Short-term vs. Long-term

In addition to interest rates, homeowners should also consider the term of their existing loan compared to those available through refinancing. Going with a short-term loan results in a higher monthly payment, but the homeowner ends up paying less interest over the life of the loan. If you have the income to handle a larger monthly obligation, a short-term loan can maximize your investment dollars.
On the other hand, long-term loans offer lower payments, which provides homeowners with more financial cushion in the event of a job loss, health crisis, or other major setback. According to some loan experts, a safer approach is to refinance with a 30-year term and make double payments when you can. This effectively turns your long-term loan into a 15-year mortgage.

Mortgage Insurance

Declining home values can impact your decision to refinance. If your home has experienced a decrease in value, you might not have enough equity to escape mortgage insurance. Although this problem will eventually disappear as your equity increases, the cost of mortgage insurance might make your payments too high in the short-term.

Once you have examined the most common factors that influence the decision to refinance, you will be prepared to make an educated decision about your financial future.