Many people hear the term “refinancing,” but few fully understand when is the right time to do it. It’s a significant decision that impacts your financial future. Refinancing can be financially advantageous under the right circumstances.
There are several logical and valid reasons behind refinancing, and we want to help you decide whether it makes sense for you and your family. The key is understanding if and when it fits into your long-term plans.
Understanding Refinancing
Homeowners can alter the terms of their loans, which is often done to secure a lower interest rate (often lowering monthly payments). It mimics the closing process, and the fees are similar. Refinancing typically involves costs, such as closing fees, so these expenses must be calculated and considered. Lowering your interest rate can also impact your credit score over the long term.
Refinancing with a lower rate can result in reduced payments, ultimately leading to significant long-term savings. As a hypothetical scenario, imagine that you refinance five years into your 30-year mortgage. Refinancing a $300,000 mortgage from a 5% interest rate to a 4% interest rate—with the remaining term adjusted for the time already paid—the monthly payments would be reduced, saving approximately $178.21 each month.
Remember, the exact savings and new payment varies based on the remaining balance at the time of refinancing and any fees or additional costs associated with the refinancing process. It's common to refinance into a new 30-year term, which lowers monthly payments but extends until the mortgage is paid off.
Another common motive for refinancing is shortening the duration of your mortgage. If you initially obtain a 30-year mortgage, switching to 15 years shortens the time it takes to own your home outright. A younger couple may have begun with a 30-year mortgage but have gained assets and financial security quicker than anticipated. They may invest in refinancing to limit their interest payments if they can afford it. Although many people would love to shorten their loan, the question shifts to your new payments. Presumably, they’ll increase. Depending on your financial position, you may be willing to accept this. The staggering upside is eventually not having a mortgage payment while living in a home that is still appreciating.
Refinancing your mortgage for a lower interest rate has its benefits. It can free up funds that you can use for expenses or savings. Before deciding to refinance, remember it's important to compare your interest rate with the rates to determine if it makes financial sense.
Let’s Look at Term
Another reason people consider refinancing is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. ARMs are subject to fluctuating interest rates. Refinancing to a fixed-rate mortgage gives you stability and predictability regarding your payments. Fixed rates protect you from entering into unexpected scenarios where you cannot afford your mortgage because of a spike in interest rates.
Extending the duration of your mortgage by refinancing may be a logical choice for those who intend to remain in your home for an extended period. They can enjoy the lower payments while also not being concerned about selling their property any time soon. Others may pursue this route to take advantage of lower payments because of a change in their financial situation.
However, it's essential to remember that a longer mortgage will result in you paying significantly more in interest over the term of your loan. Always take your term objectives into account when making this decision.
Contact Spectrum Title Services
At Spectrum Title Services, we encourage you to obtain a title quote from us as you contemplate refinancing. We are here to assist you in comprehending your choices and finding the path forward for your home and finances.