Mortgage refinancing is a great option for any homeowner who doesn’t have the lowest interest rate possible on his or her mortgage. It effectively creates a new mortgage at current rates and pays off your existing mortgage. It can lower your monthly payments and extend the time you have to repay your loan. And the best time to do it is now. Here are five reasons to stop putting it off and refinance before year’s end.
1. Interest rates are low…
Current annual percentage rates (APRs) on mortgages are likely lower than they were when you bought your home. In October 2012, the average rate nationally was 3.38, barely more than half the 2006 average of 6.41. Refinancing now can bring your interest rate down to stay consistent with the new, lower average rates.
2. …And they’re not getting lower.
As the country continues its slow recovery from the housing market crash, experts say rates aren’t likely to drop any lower. Rates have already hit rock bottom and are expected to rise over the next few years to pre-crisis levels. That means refinancing now will save more money than refinancing a year from now.
3. Your credit score has improved.
If you were much younger when you bought your house, there’s a good chance you’ve become more responsible with your money and finances since then. Old mistakes finally may have been erased from your credit report, and you might see a subsequent boost in your score. When you refinance, this translates to another decrease in your interest rate, which saves you money long-term.
4. You can extend your repayment time.
If you need significantly lower payments, you can extend your repayment time by refinancing. For example, if you’re 20 years away from completing a 30-year mortgage, refinancing can reset your 30-year limit, giving you an additional decade. Keep in mind that this means you’ll be in debt a decade longer. While it will lower your monthly payments, it will create more time for interest to accrue, meaning it will cost you more by the time you’re done repaying your mortgage.
On the other hand, you may want to get out of debt faster. If you have the means to do so, you can turn your 30-year mortgage into a 15-year one. This will make you a better lending candidate and can lower your interest rate. A shorter lending period also means less time for interest to accrue, saving you money in two ways.
5. You can use your mortgage to pay off other loans.
If you have other debts to pay off, you can choose a cash-out refinance. This means you’ll take out a larger mortgage than you currently have. You can then use the extra cash to pay off debts like credit card debt that have significantly higher interest rates than your mortgage.
For example, assume you owe $90,000 on your mortgage and another $10,000 in credit card debt. When you refinance, you can take out a $100,000 mortgage and use the $10,000 to pay off your credit cards. Since cards have higher interest rates than your mortgage, this will save you money. However, be aware that this turns unsecured debt into secured debt. If you fall behind on payments, you risk losing your home to foreclosure. Additionally, it will only serve to exacerbate your debt problems if you rack up more credit card debt.
Refinancing is a useful tool, but it isn’t right for everyone. If you have questions or concerns about your specific situation, speak with a representative at your mortgage-holding bank.