Nowadays, we are all trying to figure out a way to increase our monthly incomes or save some money. It is why some people opt for getting a part-time job, while others eliminate additional expenses such as purchasing the latest devices and dining out.
If you are a homeowner, you are probably thinking about refinancing your mortgage. There are many great companies, such as Mint, that can help guide you through the process. Many people choose to do this to lower the interest rates, the monthly payments, and therefore, save a few hundred dollars a month. However, going down this path is not always a good idea, and here are some things you have to consider.
What are the benefits of doing this?
Firstly, we will tell you about some of the most common reasons people choose to this. You are already probably familiar with these, but we will discuss them in great detail.
1. Increase savings
The main idea behind refinancing your existing mortgage is to take advantage of lower interest rates or decrease the monthly payments. Obviously, when you lower the monthly fee, you will be able to pay off the mortgage faster, and hence, you will pay less for the interest rates. In the long run, it means that you will not only save a lot of money but that you will be able to invest in other savings account faster.
Nevertheless, there is a question you must answer. When should you do this? Well, a general rule is to go with this option only if you can lower the rate by 2%, minimum. This would be ideal, but nowadays, you can do this even if it’s just 1%. There is an easy way to calculate whether you should do this or not, and you can find detailed instructions on www.cours-gratuit.com.
2. The transition between adjustable and fixed-rate mortgages
Generally speaking, most homeowners opt for an adjustable-rate mortgage simply due to the fact that its interest rates are lower. Nevertheless, as you can assume, these can easily change, and at a certain point, they can reach the top rates of the fixed one. When this happens, you can go with refinancing as a tool to switch to the fixed mortgage to ensure that you won’t have to pay for higher rates.
On the other hand, if your situation is reversed, meaning that you took out a fixed-rate loan, and the interest rates are dropping, you should transition to the adjustable-rate loan. Still, this isn’t a good idea now simply because of the fact that the chances of these rates dropping are slim to nothing. Therefore, you would make a huge mistake and probably end up spending more money on paying off the loan than you originally planned.
3. Remove mortgage insurance
If you have taken private mortgage insurance (PMI) on your home, then you know how high this monthly expense can be. Generally speaking, you can ask the lender to eliminate this insurance once you have 20% equity on your home, and when you reach 22% percent, it will be done automatically.
However, if you want to lower the cost and you haven’t met these requirements, you can use refinancing. If your loan is insured by FHA (Federal Housing Administration), then you were obliged to take the mortgage insurance. You were faced with the initial cost, and then you continued paying the annual premium. Well, by refinancing this mortgage and paying off the FHA loan, you can switch to a traditional loan once you reach the equity of 20%.
When you shouldn’t do this
Naturally, there are many instances when doing this is the worst idea. You may risk increasing your debt and, eventually, destroy your finances.
1. Getting a cash-out
Yes, we know, everyone wants to go on a shopping spree and visit an exacting country or purchase something they have always wanted. When it comes to this, there is one thing we all have in common – oftentimes, we cannot afford it. So, if you are thinking about refinancing your mortgage to do exactly this, let us tell – it is the worst idea ever.
The only situation in which getting a cash-out refinance is a good idea is if you have a detailed, bullet-proof financial goal in the future. Otherwise, you may end up risking your financial future and security for a short-term goal.
2. Skip monthly payments
No, this is not possible. Okay, technically it is, but it won’t save you any money. The truth is that even though you won’t have to put down a traditional payment every month, you will still give that money away through the high-interest rates. Yes, lenders may advertise this no-cost refinance, but it won’t take you long to realize that there are multiple additional expenses that you have to pay.
3. Improve short-term finances
No one is saying that paying off a mortgage is easy. There are times when your cash flow is low, and then you will probably look for different ways to boost it up. Well, going with mortgage refinance is the last thing you will do. Why?
Yes, you will decrease the monthly payment if you transition to a new loan that will add extra payment years. However, don’t forget that there are closing costs on this, which is just another additional expense. Similarly, the fact that you will be paying it off for the additional number of years also means that you will pay more for the interest rates. Even though it may seem to be a great idea for your current finances, if you do long-term calculations, you will understand that you won’t actually get to save any money.
Saving for a new home
Professionals all agree that mortgage refinance is not a good idea if you plan on moving in the foreseeable future. Why? Well, simply because you won’t be able to gain all the benefits, so there is really no point in going forward with this? Well, yes, you will lower the monthly fee, but keep in mind that refinance is not free, meaning that you will have to pay around 2% for the closing cost. Due to this reason, it will take you a few years to break even, so if you are planning to move to another home during this time, you won’t actually get to save any money.