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Should I Refinance? Six Things to Consider


After paying your bills, getting groceries and handling all the other expenses that have a way of popping up, it may seem like you never have anything left to put toward important things, like your children's education and your own retirement. It's a common problem, and if it sounds familiar to you, you're probably looking for a way to cut costs.

According to the Value Penguin, housing is the biggest cost for the average family, accounting for 16 percent of the total budget. Reducing the amount you spend on housing is a good way to reduce your total costs, and it doesn't have to involve moving into a smaller place. You might be able to save a significant amount of money by refinancing your mortgage.

When you refinance, you pay off your original mortgage and get a new one. If the terms are better, you can save a bundle. It's a complicated process with serious financial ramifications, however, so it shouldn't be attempted without considering the following factors.

  1. Have interest rates improved since you purchased? This is one of the main reasons to refinance. If you can save a percentage point or two, it's probably a good option. Using the Simple Mortgage Calculator, we can estimate that a 30-year home loan of $260,000 for a house valued at $300,000, with an interest rate of 5.5 percent, will lead to monthly payments of $1,362.69. If we change the interest rate to 4.5 percent, the monthly payments drop to 1,216.04. That's a savings of $146.65 each month.
  2. Is your credit good? The better your credit, the better your rates will be. If you've improved your credit score since buying a house, you might get a better deal by refinancing now. On the other hand, if you've taken on a lot more debt and seen your credit score drop, you might be better off sticking with your current mortgage.
  3. Are you happy with your mortgage company? Refinancing is an opportunity to switch mortgage companies if you're not satisfied. Doing so may complicate the process, but it could possibly result in a better interest rate.
  4. Do you want cash back? When refinancing your mortgage, it's sometimes possible to get cash back by tapping into the home's equity. This can help you pay off other debt, but it also increases the amount of your mortgage. If you can pay off high-interest debt and save money, this may be worthwhile. Crunch the numbers, and don't make the mistake of looking at the cash as free money, or you'll be paying for it later.
  5. What fees will you be charged? Check your old mortgage and your new mortgage for any penalties or fees, and make sure you've included these extra expenses in your calculations. For example, your old mortgage could have a penalty for early payoff and your new mortgage could cost roughly 1 percent of your loan value. Compare the potential costs to the potential savings.
  6. Will you be extending your repayment period? When you refinance, you take out a new loan, and this can extend your repayment period—sometimes significantly. For example, if you only have 10 years left on your loan when you refinance with a new 30-year mortgage, you’re adding 20 years to your repayment. Although it might help you in your current situation, it could make things difficult as you approach retirement. Do your future self a favor and think about whether this is really a good idea.

Whether you decide to refinance or not, make sure your property is adequately protected with homeowners insurance. We recommend reviewing your coverage levels annually.