Should You Refinance Your Mortgage?

Mortgage refinancing essentially involves replacing your current loan with a new one, ideally one that has better terms. If done right, mortgage refinancing can help you save money. However, it can also become an expensive mistake in certain scenarios. If you are looking to refinance your current mortgage loan, make sure to understand exactly what refinancing entails and what the associated costs are before you make your decision.

When Mortgage Refinancing Is A Good Idea

1. Lower interest rate: If the market conditions have improved since when you got your loan, you may be able to find a new loan with a lower interest rate. In such a case, it can help to refinance to a lower-rate mortgage.
2. Improved credit score: If your credit score wasn’t in the best shape when you got your mortgage, it’s safe to assume that you may be paying a higher-than-average interest rate. If your credit score has improved over time, you may be able to qualify for a new mortgage with better terms.
3. Switching to a fixed-rate mortgage: If you are currently on an adjustable-rate mortgage and the current interest you are paying is a lot higher than the introductory APR, you may want to refinance to a fixed-rate mortgage. A fixed-rate mortgage can help you plan your monthly payments.
4. Debt consolidation: If you are paying high-interest debts that are draining your disposable income, it may be a good idea to refinance your loan and consolidate your debts.

When Mortgage Refinancing Is A Bad Idea

1. You need to pay a substantial prepayment penalty: If prepaying your original loan comes with a huge prepayment penalty, you may be better off sticking to the same loan.
2. You intend to sell your home soon: If you are looking to sell your home soon, the savings from refinancing your loan will probably not be enough to offset the costs of restructuring the loan.
3. The lifetime cost of the loan will be higher: Although your monthly payment may be lower, make sure to take the lifetime cost of the loan into account.

Before you refinance your loan, it’s important to do the math, to check whether you will actually be able to save enough money by refinancing the loan.