With interest rates low at the moment, many homeowners are making the decision to refinance their homes in hopes that they can save a few dollars here and there. There is nothing wrong, after all, with saving money on your mortgage. The good news about refinancing is that it is designed to help people save money. However, many people use it for another reason. While many of us might refinance to lock in a lower interest rate and lower our payments by refinancing for the same amount of time we still have to pay on our mortgage rather than lengthening it to 30 years again, others don’t.
Some people refinance for another 30 years so that they can take out some cash on their home’s value and have it left over for some other things. This is not a bad idea if you want to spend some money on a remodel or on an upgrade or two that will increase the value of your home and make it worth more in the long run. However, there are certainly a few things that all homeowners should be aware of before you make the decision to go out and refinance your home. Some considerations are worth making.
From Adjustable to Fixed
One of the absolute best reason to refinance your home is to change and adjustable rate mortgage to a fixed rate mortgage (ARM). An adjustable rate is never something you want to have if you can avoid it. you don’t know when the rates will change, by how much they will change or what this might mean for you in the future. A fixed rate mortgage means you’ll have the same rate for the life of your loan, and that is always the goal you want to achieve.
Can You Afford to Refinance?
One thing that you have to consider before you make the decision to refinance is whether or not you can even afford to do it. Do you have the credit to do it? Even if you think that you do have an excellent credit score, you might want to think again. There could be some factors you have not considered, such as the fact that someone might have borrowed your identity without you knowing. Additionally, there might be simple mistakes on your credit report that require you fix them prior to actually getting the refinance process over with.
Before you go in to refinance your home for a lower rate, you do need to consider whether or not you can even bother refinancing your mortgage thanks to your credit. If there are mistakes listed on your credit report, now is the time to go in and fix them and make sure that they are not affecting your life and your refinance.
What Are You Refinancing For?
This is probably the biggest consideration you need to make before you actually refinance. If you want to refinance because your home is worth more, you’re only 3 years into paying for it and you want to update the kitchen or the bathrooms to add more value to the home, refinancing for another 30 years at a lower rate might not be the worst idea. However, if you are refinancing your home for the full value for 30 years even though you’re 20 years into paying for your mortgage, you might want to consider the issues you’re facing.
For one, you’re almost done paying on your house. Do you really want to start over this close to retirement? Do you really want to pay for your house for 50 years instead of 30? Do you really need that much money and if so, what are you using it for? Buying a new car to avoid having a car payment is a bad idea. You only pay for a car for 5 years or so, drive it for less than that in most cases and then get a new one. Do you want to roll your car payment into a 30-year mortgage refinance and pay on a car you’re never going to drive for 30 years for 30 actual years?
The Associated Costs
Now, we have to tell you that there are a few other things to consider before you refinance. Even if you think that it’s a good idea and you are in the position to do it, you do need to know that it is not free to refinance. In fact, it takes some time and some money. There are a lot of fees associated with refinancing that are not being waived. Closing costs are just a few of those fees, so you have to be sure you can afford to pay for them or that you’re okay having them rolled into the life of the loan. Are you all right with that, or would you rather not refinance?
Photo by Getty Images