When we secure a mortgage, it often feels like we’re setting the stage for the next 30 years of our lives. However, reality often proves otherwise due to fluctuating interest rates, adjustments in property value, or simply life throwing us a curveball. In response to such changes, it’s common to start reconsidering our existing mortgage arrangements. If you’re contemplating these factors, you might want to consider refinancing your home loan.
Considering Current Mortgage Rates
Presently, mortgage interest rates are below 4%, offering a compelling reason to refinance, especially if your mortgage interest is 4.25% or above. However, the refinancing decision shouldn’t just be based on this factor.
Keep in mind, when you refinance, there will be unavoidable closing costs. The widely adopted practice is to incorporate closing costs into the new loan, avoiding upfront payments. However, this strategy leads to an increase in the complete loan sum you’re refinancing, resulting in more interest to be paid each month throughout the loan tenure.
Sometimes, this approach can still make sense, depending on the remaining balance on your house and the duration over which you plan to refinance.
Our Personal Experience
Refinancing didn’t work for our property. Our goal is to pay off our mortgage in 10-11 years and contribute more than the required monthly principal installment. We aim to expedite the mortgage pay-off without incurring refinancing costs. Our mortgage advisor crunched the numbers and agreed that given our current 4.25% mortgage rate, refinancing to a 15-year term wouldn’t result in significant long-term savings. We were advised to maintain our current strategy, allowing us to pay off our mortgage sooner without the complications of refinancing.
However, for many not making additional monthly principal payments or dealing with higher interest rates, refinancing may prove advantageous. And, with some luck, you may find a firm that doesn’t levy any closing costs.
Increasing Property Value
If your decision isn’t propelled by mortgage interest rates, then a steady rise in your home’s value might spur you to reconsider your mortgage. American property values have steadily increased since the Great Recession, providing a financial cushion to homeowners. This trend opens a window for refinancing your mortgage, especially if you’re planning home improvements to further boost your home’s value.
Refinancing could fetch you a lower interest rate, and the extra money could fund home improvement initiatives. However, remember that the funds utilised for home improvements will accrue interest. Make sure to calculate if the increased monthly mortgage is justifiable with respect to the prospective value of your improved home.
Utilizing a HELOC
If you’re unsure about refinancing, considering a Home Equity Line Of Credit (HELOC) might be a better way to achieve the same objective. When using a HELOC, you only pay interest on the funds you actually use, reducing the interest burden if you don’t utilise the whole amount immediately.
We opted for this alternative instead of refinancing last year—it aligned more closely with our financial goals.
Life Changes
Sometimes what triggers the need for a mortgage reconsideration isn’t related to mortgage terms or property values, but life itself. Reasons such as medical debt, higher education, car problems, a new baby, or even setting up a new business can tip the scales towards refinancing.
In such situations, refinancing to procure necessary funds could be a feasible solution, given the relatively low-interest rates of housing loans. However, how much you can secure depends on your property’s worth.
Usually, you can refinance up to the complete value of your mortgage and withdraw the difference between the amount owed and the new mortgage value. But with a HELOC, you can only extract a particular percentage of the property value. Hence, you may access more cash by opting for refinancing.
To Refinance or Not
It could well be an opportune time to refinance due to the relatively low interest rates. Plus, you might find a firm that waives closing costs to refinance, enhancing the benefits.
If you’re aiming to upgrade your property’s value, refinancing may prove fruitful, with the refinance proceeds potentially contributing much when you sell.
Or, you might simply need the extra cash for life’s unexpected turns. Either way, it’s crucial to evaluate your options thoroughly and assess the long-term implications of refinancing before diving in.
Are you considering refinancing your mortgage? If so, what triggered the decision, and how do you plan to utilize the extra funds?
