Refinancing the mortgage on your home refers to replacing your existing loan with a new one. You simply apply for a new mortgage against your property and pay off the remaining balance of your old loan.
But before you decide to refinance your home, you should consider the following smart things.
Consider Whether Refinancing Will Lower Your Interest Rate
Lowering interest rates is definitely one of the most popular reasons for homeowners deciding to refinance, but you need to ensure the math pans out, especially if you’re shortening the period of your loan term.
Borrowers with high-interest rates can often benefit from refinancing because shorter-term mortgages typically have lower interest rates than mortgages with longer terms and you’ll pay back the loan in less time. However, your monthly payments are likely to increase.
Refinancing Could Enable You to Improve Your Cash Flow When You Have High-interest Debt
If you want to improve your cash flow and save money in the long run when you have high-interest debt on credit cards, personal loans, and other loans, refinancing can be a good idea.
However, be aware that if you aren’t using the funds to buy, build, or improve your home, you may be unable to deduct the mortgage interest that you pay on the cash-out amount that exceeds your existing loan balance.
So, make sure you use the additional funds appropriately.
You Can Tap into Your Home Equity for Cash
Even if you don’t have high-interest debt, refinancing your home can allow you to access funds for things like home improvements. And you can also use the funds for other purposes, such as paying for your child’s tuition fees.
Make sure you determine what you want the funds for to see if refinancing your home is the best option available.
Be Wary About What You Use Funds For
Following on from the last point, you should never tap into your home equity by refinancing your home loan when you don’t have any clear reason for using those funds.
For instance, if you simply want to splurge cash on luxury purchases, such as paying for a vacation or a sports car, you could quickly find yourself getting into financial trouble.
You would be taking on the liability of additional home debt without actually reducing the cost of your liabilities or adding value to your assets.
So, while it could be tempting to refinance your home to get additional funds at a low rate, always remember that you would be securing luxury purchases against your home.
And with less equity in your property, you would have less equity to tap into, over time, and your depreciating assets could soon drag you down financially.
In General, Avoid Refinancing After You’re Halfway Through Your Mortgage
Finally, it is more than worth mentioning that it’s rarely a good idea to refinance your home when you’re more than halfway through a mortgage.
When you’re in the final half of your mortgage, whether that’s a fifteen-year or thirty-year loan, it’s not a good idea to refinance because you’ll finally be at a point where you’re paying back more principal than you are paying interest.
Generally, it only makes financial sense to refinance once you’re past the halfway point of your mortgage if you’re retired and on a fixed income and you need to lower your monthly payments in order to better manage your cash flow.
Refinancing your home can often make sound financial sense, but it’s crucial that you look at your specific situation to determine whether refinancing is the best option.
So, be smart and consider the above things before you proceed.