There are many reasons refinancing can be a beneficial and smart move, and many of them come directly from looking at current interest rates. Refinancing is a great way to potentially lower your current interest rate (and payment). If you’re planning on staying in your home for a few more years, refinancing can save you in the long run.
Now Is the Time
Interest rates are still not far from recent all-time lows, which means that now is the time to see if there’s an opportunity to decrease your interest rate. Mortgage rates constantly fluctuate, so ask your mortgage consultant whether now is a good time to refinance.
In the long run, making the effort to fill out some paperwork and go through the loan process could potentially save you thousands of dollars in interest.
Refinancing may significantly reduce the amount of your payments. Reducing your payment amount can save thousands over the period of the of the loan and up to hundreds per month. For example, a $250,000 loan at 6.5% would equate to a monthly payment of $1,580.17. The same loan at 4.5% would equate to a monthly payment of $1,266.71. This money can be saved, invested or used in a way that best fits your situation.
Instead of lowering your payment, you may want to consider shortening the term of your loan. Switching from a 30-year loan to a 15-year loan may be a better option for some. As interest rates have decreased, 15-year mortgage payments may not be that much more expensive than 30-year mortgage payments. Being able to pay a little more per month could a better option than paying more on interest over a longer period of time. Switching from an adjustable rate to a fixed rate is a possible choice as well.
Things to Consider
As there are reasons for refinancing, there also exist reasons to avoid it. Refinancing to a loan with a lower interest rate can lower the amount you are paying each month. Looking at the overall cost is very important. You may extend the loan beyond what is necessary and end up paying more in interest. Other potential problems to be aware of are the costs associated with refinancing.
Consolidating debt can be a risky move for homeowners. It can make sense paying off high-interest debt with a low-interest loan. Doing this changes non-collateral risk, such as credit card debt to debt that is backed by your home. The total amount paid is likely to be dramatically higher due to the increased length of the loan.