There are a lot of reasons for which homeowners choose to refinance. However there is a refinancing fees and a lot of paperwork involved in the process, so you must make sure that refinancing proves beneficial for you in the long run.
So before deciding to refinance, ask yourself:
• Why do you want to refinance?
• Will refinancing help you achieve your goal?
• And is it worth it?
Some of the common reasons for people to choose refinancing are: obtain low interest rate; get a shorter loan term; convert the loan type for ex. From ARM to fixed rate; cash the equity they own in their property.
Low interest rate
Even a one percentage point difference in rate can make a huge difference in terms of monthly payments. But the real bonus is what you save over a period of time because of those reduced interest payments. So this will make sense if you are planning to stay in your home for at least a couple of years.
Shorter loan term
If the interest rates fall drastically, this could be exactly what you want to better your financial situation. For ex. A $100,000 30-year fixed-rate loan availed at 9% can be converted to a 15-year fixed rate loan if the rate goes down to 5.5% without making any significant impact on monthly payments.
Convert loan type
Converting from a fixed-rate to ARM or ARM to fixed-rate may be wise depending upon a lot of factors. Your current rate, monthly payments, and most importantly market trends for mortgage rate. Also a tentative number of years you are planning to keep your current home should be kept in consideration.
Cash the equity
Although this seems like the easiest way to obtain cash for big expenses like college education or home remodeling, this decision should not be taken lightly. At the end of the day, it increases your debt and make sure you can afford it if you are refinancing to cash on the equity you’ve built in your home.