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When is Refinancing a Good Option?

Refinancing a home mortgage is often very attractive to homeowners for a number of reasons. If you are not familiar, refinancing involves paying off an existing home loan and replacing it with a new, better one. It is important to understand whether or not you will benefit from refinancing as it can include expensive costs upfront, and is a fairly strenuous process. The primary motivations for people to refinance are to shorten the length of their mortgage, to obtain lower interest rates, and to change the terms of their loan.

Lower Interest Rates

Obtaining lower interest rates is probably the most beneficial reason to refinance your mortgage. A rule of thumb is that refinancing is usually worth it if you will be able to lower your interest rates by at least two percent.

By obtaining a lower interest rate, you can potentially save yourself a significant amount of money, decrease your monthly payments, and build your home’s equity at a higher rate.

Shorter Mortgage Length

Shortening the length of your home loan is a hugely beneficial side effect of refinancing. By obtaining lower interest rates, you will likely be able to shorten the length of your loan without seeing any changes in your monthly payments. Paying off your home mortgage can grant you financial freedom by removing what is probably your largest monthly expense.

Changing the Terms of Your Loan

One common reason that you might want to change the terms of your loan is that you have taken out an adjustable-rate loan. If your rate on this loan is about to increase, you may decide to refinance to a fixed-rate loan in order to protect yourself from future spiked in interest.

When Refinancing is a Bad Idea

Based on the reasons above, it may seem like refinancing is a no-brainer. However, there reasons to avoid refinancing your mortgage.

The biggest reason to not refinance is if you will not be able to reduce your interest rate by enough to justify the cost of refinancing. If your rate is not going to decrease by at least one percent, then it is probably best to stick with your current loan.

Furthermore, you may decide to avoid refinancing if you think you may be moving in the near future. There are closing costs associated with refinancing, so if you will be leaving before you are able to make back those closing costs through your lowered payments, then refinancing is not worth the cost or effort.

In some cases, you may also decide you need to refinance in order to increase the length of your loan by decreasing your payments. Obviously, the short-term benefit is that your monthly costs will be lower. However, you should be sure to understand that you will be paying much more in interest over the course of your loan.

If any of these situations apply to you, it may be best to contact a CT real estate attorney to assess refinancing your home would worsen your financial situation rather than helping it.

Law Office of Chris Albanese
Attorney
July 3, 2018