It's not uncommon to occasionally stumble across an ad telling you to refinance your home mortgage. But if you are currently considering making this adjustment, it's important that you personally have a clear financial objective in mind when you do so. Home mortgages should not be refinanced just to simply lower your mortgage payment right now if doing so will cost you a lot more in the long run. Here are 3 specific examples of when it is a good idea to refinance a home mortgage.
Consolidate Other Debt
Generally speaking, credit cards are considered "bad" debt by most financial advisors while mortgages are viewed in a more positive light as something you are doing to build equity in the long run. Another reason home mortgages are viewed as a better kind of debt is because the interest rates tend to be dramatically lower than what you might be paying on a credit card, especially if that card has had a few late payments. Refinancing your home can give you the cash flow you need to pay off your high-interest credit cards much more quickly. Yes, your total mortgage payments may go up, but you will still be saving money overall when you consider the thousands in interest that you could save on your credit cards by paying them off early.
Change to an Adjustable Rate If You Know You Are Moving
Typically speaking, fixed-rate mortgages are preferred to adjustable rate. But adjustable-rate mortgages, or ARM, can make more sense in the short term. If you are paying a high rate on a 30-year fixed mortgage, but you know for sure that you will move long before then, say, in 5 to 7 years, it may make sense to refinance to an ARM. You will likely lower your monthly mortgage payment for the remainder of your time in the house.
Switch to a Fixed Rate If You Are Concerned About the Housing Market
If you currently have an ARM, you may have chosen to do so because the rates were very low at the time you bought the house. Again, ARMs can work out well in the short term. But if you see yourself staying in the house for decades, there's always a chance the market could move the interest rate of an ARM to be higher than what a fixed-rate might be going for today. Take a look at your finances with an advisor and if you are going to be in the home for the long term, consider making the switch.
Make sure that any attempt to refinance your home mortgage is grounded in a financial goal that you have for yourself. For example, you can use your home mortgage refinancing to help pay off other high-interest debt like credit cards. It may also may make sense to switch from an adjustable rate mortgage to a fixed rate or vice versa, but only if you know what the plan for yourself and your family is over the next few years.
To refinance your home, contact a financial institution such as McHenry Savings Bank.