Should I Refinance My Home?
[an error occurred while processing this directive]For many individuals out there, the question of whether or not to refinance a mortgage is an important one that demands attention. Refinancing is sometimes a good option and if done right, it can save you a lot of money. There are no hard, fast rules on when you should take the dive and refinance. Generally it is smart to do it when the numbers indicate that you will save money. This obviously should give taken with a caveat, though. Refinancing will also require you to do some market speculating to predict where interest rates will go in the not so distant future. When all of those things are thrown into the mixer together you can come up with an answer to your all important question.
Watching your interest rate and its subsequent terms
For many people, the question is a simple one. Is the new rate lower than the one you're currently sporting? If it comes down to this for you, then there is one thing you need to do before refinancing. You need to make sure before you sign any papers that your final rate is what the mortgage provider quoted you. There are many programs where you can use your good credit or improved employment status to gain pre-approval for refinancing. This is all well and good, but it won't help you any unless you make sure your rate is the one promised.
Refinancing only if you can find a short loan
Many people look at the relevant loan options and make a decision that tells them to refinance. They see a significantly lower rate and it's attached to a new, long loan term. You should not refinance if this is the only way to get the lower loan. Though you will lower your payments each month in the short term, you will be locked in to a the loan for a longer term. This means that over time, you will give up your savings and you'll end up paying a significantly larger amount of money. That will hurt you financially and it will completely counteract the positives that you might have derived from refinancing in the first place.
It is possible to refinance with a shorter loan term. You will have to check with the individual lenders in your area to make sure that this is a possibility. Some lenders will offer more flexible term options, while some hold true to the traditional term lengths.
The value of drawing equity out of your home
One of the best reasons to refinance is to draw some of the equity out of your home. Though many individuals will caution against this, there are some legitimate reasons to make this move. When you refinance and pull the equity out of your home, you can use that money to do a host of things. There are few other ways to get your hands on such a large sum of money at one time, and that kind of capital is important. You might make improvements to your home in order to increase its value over the long run. You might also use the money to pay for something big like a wedding, college education, or to consolidate bad credit card debt. All of these are legitimate uses of equity and can relieve some of the burden on you.
Avoiding an adjustable rate mortgage (ARM)
Many people refinance and lock themselves into an ARM, but this is a poor idea. One of the best things about refinancing is the security that goes with the lower rate. You know that you are saving money, so it makes sense to go through the loan process again and put up with all of the trouble. You don't want to do this now for the short-term security of a low rate, only to see your rate go up in a few years. Be sure that if you do lock in with an adjustable rate mortgage, you will see that rate rise by a significant margin over the course of many months. This can make your solid refinancing look a lot less sturdy and it can create a difficult financial situation down the road. Refinance for the sure thing.
Ultimately the decision is a highly personal one. It will depend upon your needs, your ability to get a solid rate, and your ability to work with the right kind of lender. There are plenty of reasons to refinance, especially if you are in need of the money that comes with your home equity. You shouldn't just do it because the option is on the table, though. A wise steward of money will look at all of the options and make a firm, informed decision on what will benefit his or her family most over the next decade.