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When Does Refinancing Make Sense?

Refinancing a HomeShould I refinance? This is a common question many homeowners grapple with.

But, what is refinancing? And when does it make sense?

Simply put, refinancing is basically trading off your old mortgage loan for a new one. Your bank or lender agrees to settle your old loan in exchange for a new loan under new terms.

Refinancing is a great way to access your home's equity, secure lower mortgage rates, consolidate your debt, or change your mortgage plan. 

But, when is it a good time to refinance?

So say you're locked in a ten-year mortgage with a fixed interest rate of about 3.5%, which seemed quite fair at the time. Three years down the line, you realize the fixed mortgage interest rates have dropped significantly and now sit at 1.5%. What's more, the interest rates for variable-rate mortgage loans are even much lower. From such a viewpoint, doesn't it make logical sense to break your current contract and hunt for fresh terms?

Well, it's not that simple! You see, the math involved in refinancing your loan might look straightforward at face value, but it's a bit complicated.

Breaking your current mortgage contract terms before the designated maturity date attracts penalty payouts and a couple of other ancillary costs, such as the legal fees and appraisal fees needed to facilitate the refinancing. With that in mind, you might want to do a thorough cost-benefit assessment of your financial standing and take your time to find the best refinancing deal possible, either from your current lender or a new one.

Ideally, it's crucial to have a solid game plan when looking to refinance your mortgage, and we strongly advise you do it only if there is clear financial benefit married to the process.

Here's a look at different instances when refinancing makes sense:

Refinancing to Secure a Lower Interest Rate

Like many homeowners, your most significant monthly expense is usually your mortgage payment. Therefore, it's important to ensure you get the best deal possible on that payment. Here's where refinancing comes in. Refinancing allows you to get a new mortgage at a lower interest rate than your current loan. This can be a great way to reduce your monthly payments or get out of debt sooner. Nearly nine million borrowers could save $272 per month each month by refinancing, states a recent report by the Consumer Financial Protection Bureau (CFPB). If you are one of these people, it is well worth your time exploring refinancing as an option. 

Refinancing to Shorten the Loan's Term

Recent refinance trends indicate that more than a quarter of homeowners who refinance shorten their loan term. So why does refinancing work for some homeowners? Mortgages interest rates keep changing every now and then based on market trends. So it's pretty common for rates to drop to record lows, only to shoot back up again shortly afterward. Homeowners who can capitalize on these low rates can draw sensible economic advantages from refinancing, hence shortening their loan period.

Refinancing to Tap Equity or Consolidate Debt

Are you feeling bogged down by high-interest rate debt? If you have multiple debts with various interest rates, refinancing to consolidate your debt may be an excellent option for you. You can save some money on your monthly payments by taking out a new loan at a lower interest rate. This helps you get rid of some of that pesky debt. 

According to a recent study by the Joint Center for Housing Studies of Harvard University, over 7 million borrowers refinanced their mortgages in 2016 to consolidate debt. This number has steadily increased since 2009 and shows no signs of slowing down. Refinancing is a great way to simplify your payments and potentially save lots of money on interest rates.

Refinancing to Change Your Mortgage Plan

If you feel your current mortgage plan isn't working for you, perhaps changing from an adjustable-rate mortgage or vice versa to a fixed-rate one will align better with your needs. Refinancing can help change the terms of your mortgage, and it may be just what you need to get on track with your homeownership goals. A few factors to consider when deciding whether to change your mortgage plan include your current interest rate, the terms of your new loan, closing costs, and how long you plan to stay in your current home. 

Refinancing your mortgage is a major financial decision that shouldn't be taken lightly. Ensure you do proper research and find a financial expert to help you analyze the cost of refinancing versus what you're bound to save by doing so.

If you have any questions about the Vermont real estate market, or if you’re considering buying or selling a home, contact Heney Realtors today.

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