You could be sitting on a gold mine. No, we’re not talking about digging up your back yard to look for shiny nuggets. Instead, we’re talking about your home’s value. Even if you’re still paying on that mortgage (and who isn’t?), you could find value in your home. That can come through refinancing that original loan. Perhaps one of the reasons you were able to buy that house was because you got a great deal on a loan. Good for you. However, there could be an even better deal out there. Once you’ve proven that you make your payments on time and you haven’t built up a lot more debt, it could be a good time to refinance. Here are some of the things to consider:
Lower Interest Rates
The general rule of thumb is that you shouldn’t even think about refinancing your home unless you can get anywhere from 1.5 to 2 points shaved off your current interest rates. Although that might not seem like a lot, it can make a huge difference on your monthly payments especially if you’re staring down the barrel of a 30-year loan. Here’s the cool thing about lower monthly payments: You don’t have to pay the lower amount. If you’re used to paying a few hundred dollars more, than keep up with that. It will help chip away at the loan faster. Of course, knowing you have a lower monthly minimum is a nice “safety net” for those months when expenses have gotten high.
Length Of Stay
Are you planning on staying put in your current home? At a minimum, you should refinance if you don’t plan on moving for at least three years. You’re looking for a way to break even from all those refinancing fees. Plus, if you’re not paying down on the principal of your loan amount you’ll never get out from under that loan.
Changing Loan Type
The adjustable-rate mortgage or ARM is a very popular loan to utilize when you first move into a home. It looks great on paper and you can totally budget out your payments. However, there will come a time when that adjustable-rate adjusts. Before that happens, you could get into a fixed rate loan for the duration of your mortgage. Again, you’re looking for that 2-point differential. With a fixed rate, comes a certain peace of mind. You’ll be paying the same amount for the rest of the loan schedule.
Changing Your Terms
Refinancing could also mean going from a 30-year loan to a 15-year loan. The goal is to pay off the mortgage quicker. That will certainly free up a lot of cash. It can also let you pull out equity in your home without feeling a huge bite.
Speaking of home equity loans, they are another form of refinancing. You could get a “cash-out” type of loan where you’re refinancing what you owe against the value of the home. The “cash-out” is the difference that you get in cash! Many people use this option to fund college, remodel or pay off other debts. The caution is that you while you’ll still be paying potentially hefty interest rates. In other words, the 15K you get for your new kitchen could end up costing your 20K over the life of the loan.
Clearly, you’ve got a lot to think about when it comes to the decision to refinance your home. How much longer will you be paying off your mortgage?