Having a home loan is a big financial investment. Because this is a debt that you’ll likely be paying down for decades to come, any chance you can take to reduce that debt should be seriously considered. For many people, refinancing their home loan presents this exact possibility. But if the situation isn’t right, refinancing could just be a lot of trouble for very little payout.
So to help you know if refinancing could be right for your circumstances, here are three instances when it makes sense to refinance your home loan.
You Can Reduce Your Interest Rate
One of the biggest reasons people choose to refinance their mortgage is because they’ll be able to get a lower interest rate. And if you’re going to be paying interest on your home loan for 15 to 30 years, any amount of money you can save on the interest is going to be beneficial to you financially.
However, the drop in your interest rate should be pretty sizable if you’re going to go through the trouble of refinancing. According to the staff of Investopedia.com, it’s usually not advisable to refinance your mortgage for less than a two percent decrease in your interest rate. While a one percent drop in an interest rate can sometimes be enough incentive to refinance, anything less than that probably won’t be worth it to you in the long run.
You’re Shortening The Terms Of Your Loan
Another great reason to refinance your home loan would be if you were planning to shorten the terms of your loan.
For many people, a 30-year mortgage is what they will choose when getting their home loan. However, Libby Wells, a contributor to Bankrate.com, shares that if you were to choose to refinance your home loan and turn it into a 15-year mortgage, you could save yourself a lot of money by paying less interest over time. So if you can handle a higher monthly payment on your mortgage, you could save thousands of dollars in the long run after you refinance.
You’ll Actually Save Money In The Long Run
Sometimes, a refinance might sound like a good idea. But once you see how much you could be paying for things like closing costs, you might not actually be saving as much as you thought you would. In situations like this, it’s wise to really suss out all the numbers to see if you’ll actually save money in the long run.
According to Hal M. Bundrick and Deborah Kearns, contributors to NerdWallet.com, the most important thing when seeing if refinancing will be worth it to you is knowing how long it will take for you to break even after fees and closing costs. Once you know this, you can weigh this information against how long you plan to stay in your home to see if a refinance will really be a smart financial move for you.
If you’re thinking about refinancing your home loan, consider using the tips mentioned above to see if this option makes sense for you.
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