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Timing Money Matters: Deciding When and When Not to Refinance Your Mortgage

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There are plenty of common reasons why homeowners may refinance their mortgage. Some may want to take advantage of a lower interest rate. Others may want to shorten the term of their mortgage, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.

However, timing is critical when it comes to refinancing your home mortgage. Here are some tips that could help you decide when you should or shouldn’t refinance your home loan.


Taking Advantage of a Lower Interest Rate

Perhaps the most common reason many homeowners choose to refinance their home mortgage is to take advantage of lower interest rates. Reducing your interest rate not only helps to save money on interest costs, but it also reduces your monthly repayments.

For example, if you have a $150,000 home loan and you’re paying 7.5% over 30 years, your repayments will be $1,049 per month. By refinancing to a new mortgage with an interest rate of 5.4% you could reduce your repayments on a 30 year loan term down to $842 per month.

Switching between Adjustable-Rate and Fixed-Rate Mortgage

Many lenders offer loans with ARMs that begin with lower rates than many fixed-rate mortgages. However, occasional adjustments and rate increases could mean paying higher interest costs than you would on a fixed-rate mortgage. If the interest on your current adjustable-rate mortgage has risen to higher levels than those charged on current fixed-rate loans, you could refinance and save money.

Of course, the same principle is true in reverse. If you’re currently paying higher interest costs on a fixed-rate mortgage than are available on current ARMs, you could benefit from refinancing to a home loan with a more competitive interest rate.


Shortening Your Loan Term

While interest rates are still low, you may have the opportunity to refinance your existing home loan for a new mortgage that could reduce your overall loan term. For example, if you have a 30-year fixed rate mortgage and you reduce your interest rate to a much lower adjustable-rate mortgage, you could cut your loan term significantly without changing your current repayments much.

If you have a $150,000 mortgage and you’re paying a fixed-rate of 7.5% over 30 years, your repayments will be $1,049 per month. Over the entire 30-year loan term, you’ll end up paying $377,576 in interest costs.

By comparison, if you were to refinance to a new mortgage with an adjustable-rate of 5.4% and set the loan term to 20 years, your repayments will be $1,023 per month.

Your monthly repayments are slightly lower with the newly-refinanced loan, but your loan term is 10 years shorter so you could repay your home loan sooner. You’ll also end up paying $246,611 in interest costs over the 20-year loan term, which represents a potential saving of more than $130,000.

You can work out your own mortgage repayments and how they’re affected by refinancing by using a good online mortgage calculator.

Tapping Equity or Consolidating Debt

Homeowners are able to access the equity accrued in their homes by refinancing. Some people may want to use the equity as cash to cover larger costs, such as home remodeling or paying for a child’s college education.

Others may want to use the equity to consolidate other debts into the home mortgage to reduce monthly repayments. After all, the interest rates charged on a home mortgage are usually considerably lower than the interest charges on personal loans or credit cards, so it can appear to be a good idea initially.

Unfortunately, there are times when consolidating debts into your home mortgage could end up costing you far more than you expect. For example, if you intend to sell the home in a year or two, you could end up costing yourself more money in the long run. It can take years to recoup the costs of refinancing with the savings of a lower interest rate. If you don’t intend to stay in the house for more than a few years, you could negate any potential savings.

It’s always a good idea to speak with professional California Mortgage Advisors and check your options before making your decision to refinance or not.


Making Your Decision

Refinancing your home mortgage can be a smart financial decision for many people. However, there are also times when the closing costs and various other factors may mean the time is not right for you to make the change.

The key to knowing when it’s the right time to refinance is to be sure you’re making the switch for the right reasons. If you’re aiming to reduce your mortgage repayments or shorten the term of your loan or to get your debt levels under control, then refinancing can be a powerful financial tool.


Patrick Ball is a financial consultant. He loves to share what he has learned by posting online. Look for his articles mainly on money-related websites.