When (and When Not) to Refinance Your Mortgage

Refinancing your mortgage sounds like an excellent choice for any homeowner. You can pay off your existing loan and get an even better one, which in turn can save you money and many headaches.

But if you aren’t careful, refinancing could result in bigger financial problems. You want to make sure you’re making a smart choice for your money and your mortgage when you refinance.

Here are the good – and bad – reasons to refinance your mortgage, and what you need to consider before you do so.

Good: Refinancing to Lower Your Interest Rate

When you first buy your home and secure your financing, your current credit score, income, and credit worthiness will be used to determine your interest rate. And depending on factors like your age and your financial history, you may not be able to get the best interest rate available.

Fortunately, refinancing allows you to change this. You’ll be able to get a new mortgage with a new interest rate – and if interest rates are lower or your credit is stronger, you can save some serious money.

Why It’s Smart:

When to Refinance to Reap the Benefits:

Bad: Refinancing to Dip Into Your Home Equity

It’s very common for people to refinance their homes in order to use some of the equity they’ve built up. Home remodels, college tuition, and even debts or other expenses are all popular reasons to dip into your home equity. But unfortunately this is a very risky financial move.

Refinancing your home in order to use equity doesn’t add value to your home. In fact, it does the exact opposite by taking out the home’s value in the form of cash. You’re borrowing against a home that you already owe money on, and this can leave you with far more debt.

Why It’s Not So Smart:

When You Should Refinance:

Good: Refinancing to Shorten Your Loan Term

In addition to saving money with a lower interest rate, refinancing can also offer savings in the form of shorter loan terms. Since you’ve already been paying down your mortgage, if you refinance to a shorter loan – for example, shaving 5 or 10 years off the repayment schedule – you can pay less overall.

With a shorter loan term, you may or may not see your monthly payment increase slightly. Either way, it’s a good financial decision. You won’t be charged as much interest because you’ll be on track to pay off your mortgage faster. And that means you’ll ultimately pay less for your home.

Why It’s Smart:

When to Refinance to Reap the Benefits:

Bad: Refinancing to Consolidate Debt

When you’re facing debt, financial experts say there are two smart ways to handle it: pay off the debt with the highest interest first, and see if you can lower the interest rate on that debt. However, if you’re thinking about refinancing your mortgage in order to consolidate your debt, you may not have the best idea.

Refinancing your mortgage will replace high-interest debt with a lower-interest mortgage loan. But it won’t stop you from racking up any additional debt. You need to make sure you aren’t going to add to your debt with a new credit card or other big-ticket purchase that needs financing.

Why It’s Not So Smart:

When to Refinance:

Is Now the Time to Refinance Your Mortgage?

Are you considering refinancing your mortgage? With the information above, you’re ready to decide if it’s the right financial choice for you – and if it can help you in any way. Refinancing can put more money back into your bank account, but only if done in the right ways and for the right reasons.

If you’re looking to lock in a lower interest rate, change your loan terms, lower your monthly payments, or shorten the lifetime of your loan, it’s time to consider refinancing. But there’s one important step to take before doing so: do your research to find the best new lender.

Search and consider – and also compare – what different mortgage lenders can offer you. Make sure to check the current interest rates and available options to ensure refinancing offers you plenty of benefits. Imagine how much refinancing could do for you if you score a better loan!