Should You Refinance Your Home? 5 Key Areas to Evaluate
Even if you haven’t refinanced your home, you’ve likely heard the term. But what does it mean to take out a cash-out refinance, and should you consider it?
There are five key areas to evaluate before you refinance your home. You’ll want to weigh the possibilities of low interest rates and an improved loan period against some of the not-so-great aspects of refinancing: high closing costs, long application process, and added debt.
Lower Interest Rates
According to Investopedia, you should consider refinancing if you can reduce your current interest rate by 0.75–1% or more. Lowering your interest even a percent can help make your monthly payments more manageable.
If your credit score has significantly improved since you first signed your mortgage, you may also find you can lock in at a lower interest rate. The better your score, the better the rates you can unlock. Saving on interest can save you significant money over the course of your loan.
Improved Loan Period
According to The Fiscal Times, refinancing can bring new, cheaper loan periods. Combined with lower interest rates, a shorter length of your loan allows you to start paying the principal of your loan faster, saving you thousands of dollars in interest.
High Closing Costs
As the Lender’s Network explains, refinance closing costs compare to the fees charged with a new mortgage, including loan origination fees and a home appraisal. These fees generally add up to 1–3% of the loan amount. You’ll want to determine how much you’ll save each month, how much you’ll owe in fees, and how long it will take you to save money versus how long you plan to stay in your home. Once you weigh all these factors, the savings may not be worth the hassle—or may be nonexistent.
Long Application Process
Refinancing doesn’t happen overnight. The average process from application through closing takes anywhere from 20 to 45 days. Much like getting your original mortgage, refinancing has time-consuming steps. Consider whether you have the time to devote to the process or if it makes sense to hold off.
When you take a cash-out refinance, you’re borrowing against the equity you’ve accrued in your home. If you use that cash to rack up credit card bills and get yourself further into debt, you could end up losing your home. Before opting for a cash-out refinance, weigh the pros and cons as they apply to your financial situation.
For homeowners looking to avoid high interest rates and additional monthly payments, taking a Hometap Investment can be a smart way to access the equity in your home to fund financial needs, such as home improvements or education, or pay off debt.
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The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.