If you purchased your house when interest rates were higher then current record-lows, you might be wondering: “Should I refinance?” You’d think the answer would be simple — a lower interest rate is better, right?
However, the right choice really depends on your situation, and with the way fees and mortgage interest work, a refinance can be a bad deal. Here are some key questions to consider.
- How long is the new mortgage term? Mortgage interest is front-loaded, so if you get another 30-year loan, you’re likely significantly adding to the total interest you’ll pay for your house. On the other hand, if you refinance to a 15-year loan and pay off your house faster, it could be a savvy choice.
- What are you going to do with any money you take out, or save in payments? If you can put it toward your financial goals, refinancing might be a smart money move. However, if the extra money just gets spent, it’s not benefiting your overall finances.
- What’s it going to cost you to refinance? If you’re looking to lower your monthly payments, make sure you understand how many years it will take to break even on financing fees. If you leave your house before that period is up, you’ll have lost money.
- What else is going on in your financial life? Do you have debt your paying down? Are you expecting any major life events? Will you qualify for a new mortgage? These will all affect your refinancing decision.
So, while the basic math on a refinance might seem simple, financial decisions rarely are. Refinancing might make sense if you’re not extending your loan term, plan to stay in your house for many more years and can get a significantly lower rate.
However, in many cases, making extra principle payments on your current mortgage might work out better for your long-term finances.
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