The Pros and Cons of Refinancing

With mortgage rate declines over the last few years, more and more people are looking into refinancing their homes. In fact, refinancing applications are at an all-time high. But before you decide to take the plunge into mortgage refinancing, it is important to look at all the facts. It is not always a good idea to refinance your current mortgage. You have to consider the situation you are currently in and then decide if refinancing your home is right for you.

When you should consider refinancing

There are some situations where refinancing just makes sense. If you are in any of these situations, it might be in your best interest to refinance. Here are some situations in which you might consider refinancing:

1. You can save money on interest rates

Since rates are so low now, you might want to consider refinancing your mortgage to a lower interest rate. If you plan to live in your home a long period of time, refinancing to a lower rate can lower payments and save you money. But refinancing does cost money. Most experts recommend that your new rate be at least 1.5 percentage points lower for refinancing to make sense.

2. You are converting an ARM to a fixed-rate mortgage

If you have an ARM that has risen after initially getting a low interest rate, then you can refinance in order to get a fixed-rate mortgage. This makes sense if interest rates are low and you desire to have a predictable payment every month.

3. Convert an ARM to another ARM that has better features and lower rates

Most ARMs have caps, which are protective features that limit the amount your payment can go up. But not all ARMs are the same. You may want to look for one that has better caps, which can give you more security and deliver a higher rate of savings.

4. You can build up equity faster

If your financial situation has improved since you first took out your mortgage, then you may want to convert your mortgage into a shorter term mortgage (15-year mortgage rather than a 30-year mortgage, for example.) If the current interest rates are much lower, then your payments may not go up much at all. If you're near retirement, this might be a great option so that you can get your house paid off before you retire.

5. Turn your equity into cash

If you have built up a sizable equity, you might be able to finance for more than you owe on the house. You can use this difference to take the cash, which you can use for anything you want.

Reasons not to refinance

There are some situations, however, in which it would not be a good idea to refinance. First of all, when you refinance you have to pay closing costs. Because of this, it doesn't always make sense to refinance. Here are some situations where it would not be a good idea to refinance:

1. You have already been paying 10-20 years into a mortgage

If you have been paying awhile on your home, then refinancing to another 30-year loan may end up costing you more in the long run.

2 . You credit score is lower since your last mortgage

If your credit has gone down, then you may not qualify for the best interest rates. If you cannot qualify for the lowest rates, then it may not be in your best financial interest to refinance.

3. You have taken most of the equity out of your home

In order to qualify for the best interest rate, you should have at least a 20% equity position in your home. If you have borrowed that equity through a home equity loan or other means, then the rate that you get may not be the best one possible.

4. You have a spending problem

If you have high debt from running up credit cards, then refinancing your home is not going to help your money problems. Many people see the advantages of refinancing in order to pay off their credit card debts. Unless your spending habits change, you are only putting your house at greater risk.