Buying a house is a major commitment and investment. Mortgages typically have a life of 30 years, but a lot can change in that period of time. As your family grows, your career advances, and life surprises you, you might find that your financial situation is different from when you initially took out your mortgage. Perhaps interest rates are better today and you’re looking to save money with a lower mortgage rate. Maybe you made a career move you find a little more lucrative and you’re ready to make larger payments to reach payoff sooner. Either way, refinancing your home is a great option to balance your expenses and plan for your future.
Refinancing a mortgage can be a confusing topic. What does it even mean? Essentially, refinancing is taking a better mortgage out on your current mortgage. Your goal is to completely pay off your debt. Since your agreement usually lasts for 30 years, you’ll need to pay interest. The interest you pay can either be a fixed rate or an adjustable rate. A fixed rate means it’s the same percentage of your loan amount for the entire loan period. An adjustable rate is a percentage regulated by the federal government. Already owning a home, this might sound like a review, but it’s important to remember the parts of your initial mortgage before you consider refinancing. Depending on where you are now in life, you might want to find better terms for your mortgage. Refinancing allows you to keep your home and change the payments you’re making to fit your financial needs. When you refinance, you renegotiate the terms of your loan with your current bank or find a different bank willing to pay the remaining balance on your mortgage. The new mortgage will then take the place of your current payments.
Before adjusting your mortgage, you need to know a few figures about your finances. First, you need to know how much you’ve paid so far on the initial loan. It’s also important to know where your credit score stands, as this is one of the main factors banks consider while adjusting your mortgage.
You should also consider current interest rates and the closing costs involved with refinancing. First, look at the trends of today’s interest rates. Your current mortgage lender can explain what options are available through your lending institution, but you should also investigate other lenders and compare offers. If market or federal interest rates are lower today than when you took out your mortgage, which is when it’s most common to refinance, your new loan may end up lowering your interest rate and monthly payments. This option allows you to save money for the long-term but will require another 30-year payment period. If the remaining balance on your mortgage is low and your credit score is good or excellent (690 or above), you may be able to shorten your new mortgage to a 15-year period. If you plan on staying in your home for the life of the loan, refinancing for a lower rate is likely your best choice. For example, let’s say you took out a $200,000 mortgage at a rate of 5.5%. As of today, you’ve already paid $30,000 towards your house, but you see interest rates as low as 4.2% in the market. Refinancing this way would mean starting another 30-year mortgage for the remaining $170,000, but with a much lower rate and a longer amortization period, your monthly payments would go down. If interest rates are higher, you can still refinance. Your bank might give you the option of a loan with a higher rate for a shorter period of time, meaning it will reach payoff faster. This is an option if you’re willing to make a larger mortgage payment, eager to clear the deed, or planning on living in your home for fewer than 10 years after refinancing. In addition to interest rates, you need to consider closing costs. Refinancing to a lower rate may not be worth the closing costs required to refinance. With these factors in mind, you should be able to calculate whether refinancing will give you the best long-term value.
Refinancing your mortgage allows you to take a second look at what is likely your biggest monthly expense and tweak it to fit your life now. When you purchased your house, you couldn’t have foreseen the way your life would unfold. Now that you’ve turned your house into a home, take the opportunity to manage your finances by refinancing your mortgage and designing payments that help you meet a final goal. 
Alix Clise
Home & Yard Magazine
