Refinancing your home could be a great financial decision if you want to save money, but timing is everything. How do you know if you’re ready to refinance? Our quick list of pros and cons will help.
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If you're a homeowner, your mortgage interest rate plays a huge role in how much money you're putting into your home loan. Hopefully, your rate was low when you signed closing paperwork. However, if you bought with a higher rate or an adjustable mortgage, refinancing may provide you with a great opportunity to benefit from a lower rate. Is now a good time for you to refinance and save more money over the length of your loan? Let's look at some aspects of refinancing, and run through the pros and cons of each.
Upfront Costs vs. Long-Term Savings
PRO: Refinancing a home can save you dollars. Lots of them. Dropping your rate by as little as 0.25% may seem like small potatoes, but think of it this way: a mere $60 a month results in $720 annual savings. You could put that money aside for a vacation fund, or simply use it to pay monthly expenses.
CON: You might be saving over the long term, but refinancing also comes with upfront costs. Just like when you closed on your original loan, you'll pay closing fees, as well as any additional expenses, such as the cost of an appraiser. While you will most likely skip a mortgage payment during the month following the refinance, those closing costs result in dollars that aren't going to your mortgage's principal. You'll have to figure out how much you'll pay upfront and whether or not you're in the right financial situation to pull the trigger. (Use our mortgage calculator to see what you can afford.)
Flexibility vs. Convenience
PRO: Choose loan terms that fit your current lifestyle – do you have an adjustable rate mortgage (ARM) and wish for a fixed rate? Or, you can also opt for another ARM that keeps your payments low. You also have the option of paying off other debt with a cash-back refinance, such as your credit cards or student loans. This might make sense if you're paying too much on a high-interest credit card, for example.
CON: While paying off higher-interest debt is generally a positive step. Cash-back refinancing means removing some of the equity in your home to make those payoffs. This can negatively affect your debt-to-income ratio and your overall FICO score. Be sure that: a) you can afford your new mortgage payments; and b) understand the impact on your debt-to-income ratio.
Shorter vs. Longer Term
PRO: Not only may you be able to lock in at a lower rate, but you may be able to opt for a shorter loan repayment period. Generally, the shorter the term, the lower the interest rate. However, there's a flipside to that coin: it also means you'll be paying significantly more toward your principal each month.
CON: Paying over a shorter loan period could substantially increase your loan payment, which could potentially take funds away from other important elements to your overall financial plan. Know what you can and can't afford before you get excited about a lower rate you might qualify for. Ensure you have a good long-term financial outlook before making the decision.
Is refinancing right for you? Like so much else in life, timing is everything. Make an appointment to chat with a BECU mortgage advisor!
Schedule an appointment ahead of time, or call 800-233-2328.