Refinancing is an excellent opportunity to take advantage of low interest rates and lower monthly payments so you can pay down debt. The decision to get a new loan on what is probably your most expensive possession should not be taken lightly, though.
Before starting the refinancing procedure, be sure this financial move is right for you by answering the following three questions:
1. Do I plan to stay in my home for at least 5 years?
The fees for a home refinance generally amount to between 3 to 6 percent of the loan amount, so it is important to stay in your house long enough to make up for the cost of refinancing. In most mortgage situations, the refinance fees can be recouped within 5 years.
2. Will refinancing help me meet my financial goals?
If you want to free up more money every month in order to pay off credit card debt, then a refinance that lowers your monthly payment promises to do just that. But if you're looking at lowering your overall debt, refinancing may not be the answer, because the transaction will cost you refinancing fees. And if you want to retire at a certain date, taking on a new 30-year loan may make such future plans impossible.
3. Is my interest rate guaranteed not to change before the loan closes?
One of the main reasons you are refinancing is most likely to secure a better interest rate. So if the rates rise before the loan closes, that would be a definite negative that could end up costing you more in the long run. Ensure that the interest rate won't change by seeing that there is a lock-in feature that guarantees the same rate at closing. Also ask for the option to float down the interest rate if the rates fall before you sign the final papers.
When circumstances are right, refinancing can be an ideal opportunity to cut interest rates and consolidate debts so that you can reach your financial goals.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.