Refinancing your mortgage can give you an opportunity to switch to a new loan with a lower interest rate or a different repayment period. Often, refinancing is a wise financial move. In some circumstances, though, it’s not worth it.
Consider Potential Savings and Your Breakeven Point
You might be thinking about refinancing to reduce the amount you spend on your mortgage every month or the total that you’ll pay in interest over the life of the loan. If you refinance, you’ll have to pay closing costs, which will likely total several thousand dollars.
To figure out if refinancing would be in your best interest, calculate how long it would take you to break even. Divide the amount you would have to pay at closing by the amount you would save each month. That’s the number of months it would take you to break even. If you plan to stay in the house for more than that amount of time, refinancing can save you money in the long run. If not, refinancing won’t make financial sense.
Consider Switching From an ARM to a Fixed-Rate Loan
If you have an adjustable-rate mortgage, it can be stressful to know that your interest rate and monthly payments will change periodically, but not be able to predict how much they’ll change. Refinancing to a fixed-rate mortgage can give you more predictability and eliminate worries about a potential spike in your monthly payments.
Review the terms of your ARM, including your current interest rate, when the rate will reset and how much it can change. Find out what interest rate you could get on a fixed- rate mortgage and how much you would have to pay in closing costs. Consider your potential savings and how long you intend to live in the house and figure out if refinancing would pay off.
Weigh the Pros and Cons of Changing Your Loan Term
You might be thinking about switching to a mortgage with a shorter term so you can pay off your house sooner. Perhaps you took out a 30-year loan, but you’d like to refinance to a 15-year mortgage so you can own the house outright before you retire.
If you switch to a mortgage with a shorter term, your monthly payments will increase, possibly by a lot. If your job is secure and you’re confident that you could handle the higher payments, shortening your loan term can be a good move.
On the other hand, you might struggle to cover higher housing payments and other expenses, plus save for retirement. A job loss or another serious financial setback could put you at risk of foreclosure.
You might be thinking about refinancing to extend your loan term. Switching to a mortgage with a longer repayment period could reduce your monthly payments, but you’d pay more in interest over the life of the loan. Extending your mortgage term might also force you to delay retirement.
