Mortgage Refinancing – Is It The Right Financial Move For You

Mortgage rates are unpredictable—they either trend low or high, depending on the state of the market. The current times have seen a record low drop in the rates, and plenty of homeowners are considering a mortgage refinancing. Doing so can definitely help you save on monthly payments, as well as get a little cash for any projects you wish to pursue.

Regardless of your current reasons, a mortgage refinance is a decision that needs to be regarded with careful consideration. Seeing as you’ll be going through another mortgage approval process, there will be fees involved. Your overall financial situation should also be considered—you’ll want to improve it, not worsen it.

Before coming up with a final decision, here are some of the best reasons you could possibly make for refinancing—if your current reason does not fit, it’s best to move on and sit this one out:

Reason #1: You wish to consolidate a high-interest debt

If you’re currently dealing with a large amount of high-interest debt on personal loans or credit cards, applying for a cash-out refinance can help you gain momentum once more. By improving your cash flow, you’ll be able to save money in the long term. With luck, you can also end up taking a higher mortgage rate.

The only drawback here is that it will render you unable to deduct mortgage interest if the cash-amount exceeds the current loan balance—if the funds won’t be used to buy, build, or improve your home, you risk losing the bargain. You’ll also essentially be securing a credit card debt with your home—if things go wrong, you can potentially lose your home.

Reason #2: You want to lower your interest rate

Coined as the “rate-and-term” refinance, this reason is a popular choice among homeowners looking to apply for a refinance home loan. Those currently dealing with a higher interest rate can benefit greatly from this choice, especially if they wish to shorten their loan term. Given the current circumstances, low mortgage rates mean it’s less expensive to borrow money—a successful application will boost your chances of lowering the interest rate.

Keep in mind that short term mortgages typically have lower interest rates, but monthly payment tends to be higher. By switching to a short-term mortgage plan in the middle of your mortgage repayment period, you’ll be able to save more.

Reason #3: You wish to get rid of mortgage insurance

You could benefit from refinancing your mortgage if you have private mortgage insurance (PMI) along with your home loan. Refinancing can reduce your monthly costs, especially if your loan has insurance issued by the Federal Housing Administration (FHA).

FHA loans are great if you wish to own a home but lack savings. These loans, however, come with mandatory mortgage insurance. Once you pay your upfront premium, you may still have to pay an annual mortgage premium that you cannot cancel for the rest of the 30-year period. This premium can increase over time. Once you have 20 percent equity in your home, refinancing an FHA loan to a conventional mortgage can eliminate this PMI.

The Bottom Line

Although the stakes are definitely high, refinancing can become a great financial move—you need to play your cards right, however. Given that it can shorten your loan, consolidate credit, and even eliminate mortgage insurance, it’s a valuable tool in ensuring that you live a financially healthy life.

Before you apply for a refinance, however, remember to analyze your current financial situation carefully. If the math pans out and your reasons are practical, seize the opportunity!

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