Should I Refinance?Sep 20 2011
With the current market, rates are dropping quickly to all-time lows, and there’s a boom in refinances. You may be wondering if you should jump on the refinance bandwagon. If you are, there are a few reasons why you may want to refinance.
The number one reason why most people refinance is to secure a low interest rate. Most say that you should only refinance if the interest rate can be reduced at least 2%, although some also argue 1% is enough in today’s economy. Securing a low interest rate can increase your rate at building equity while decreasing the size of your monthly payments. For example, a 30-year fixed-mortgage with a 9% interest rate on a $100,000 loan would mean $804.62 per payment. Now, if you refinance that loan with a 6% interest rate, your payment is lowered to $599.55.
Another popular reason to refinance is to shorten the loan’s term. This is similar to what was talked about above, however you pay the same payment as you did prior to the refinance and you’re able to pay off your mortgage quicker.
Refinancing also gives you the chance to convert your loan from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa. ARMs are usually a lower rate when you first get your mortgage in comparison to fixed-rates. But with periodic adjustments, you may find your interest rates much higher than the available rates at the time. On the other hand, if rates are falling quickly, as they are now, it’s much better to have an ARM rather than fixed, as it eliminates the need to refinance every time rates drop.
Lastly, people also tend to refinance to tap into equity and/or to consolidate debt. A homeowner usually does this to let the equity cover bigger expenses, such as renovations to the home or a child’s college fund. However, this is usually not a useful move, as it is never good to increase the number of years you have to pay off a mortgage.
With any of these reasons, it’s always important to make sure the pros outweigh the cons. Keep in mind that a refinance costs between 3%-6% of a loan’s principal.