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Sep 2019

3 Reasons Why Refinancing Should Stay Top-of-Mind

We all know that buying a home requires maintenance. But it’s not just maintaining the house itself, it’s also maintaining the financial responsibilities of owning a home. So, when there’s an opportunity to decrease costs or use your money wisely with updates, it’s important to do so. That’s where refinancing comes in.

Refinancing is the process of financing your loan all over again but with different loan conditions.

Simply put, it means you’re replacing your existing loan with a new one. You don’t get rid of your debt, you just move it to a new loan. So by refinancing, you could possibly lower your interest rate or lower your monthly payments, giving you some extra wiggle room that you wouldn’t have had with your original loan.

Why should you keep refinancing top-of-mind?

No one knows what will happen during the 15 or 30 years of your mortgage term. And just like the housing market fluctuates and rates go up and down, your career, family situation, and other circumstances can change, too. There are certain times refinancing might be a good financial move, here’s three of them:

1. The interest rates went down or up

If interest rates fall significantly enough, it might make a lot of sense to refinance since you could lower your interest rate, and likely reduce your monthly payment, as well. Or, let’s say you have a 30-year loan, you could refinance to a 15-year loan. Maybe by that point, you’re also making more in your career so you can afford the higher monthly payment. But why would anyone refinance when the rates start climbing? Well, a great example is if you have an adjustable-rate mortgage; one that fluctuates during the loan term after a certain period. If interest rates have started to rise, and you suspect it might be a long-term thing, then it could be a good move to refinance to a fixed-rate mortgage so your rate will stay the same throughout the term of your mortgage.

2. Household income changed

Whether the total household income is going up or down, refinancing may be a smart decision for your home. If your household income decreases, for example, or if you or your significant other takes time off work to take care of kids, it may be wise to refinance to a longer loan, potentially decreasing your monthly loan payment. On the other hand, if your household income has increased, you could refinance to a shorter loan term if you’re able to afford the higher monthly payment. The benefit of doing this is that you could pay off your home much faster, build equity faster, and save more in the end. In fact, it’s possible save thousands long-term by with 15-year mortgage instead of a 30-year mortgage. Whether your total household income is going up or down, if you or your spouse’s job changes significantly, for example it goes from a commission only job to a salaried job, then it may be worth considering refinancing your home.

3. Your debt-to-income ratio shifted

One of the big qualifying criteria that lenders examine when you apply for a mortgage is your debt-to-income (DTI) ratio.

Debt-to-income (DTI) is a simple calculation that takes a look at all your monthly debts and compares them to your monthly income. Debt divided by income gives you your debt to income ratio.

Debt can include car loans, student loans, credit card debt, etc, while income is your gross income before taxes and deductions. So if your debts have decreased, let’s say you paid off your car or you’ve paid off your student loans, then that gives you some more money to play with. If you have goals of paying off your mortgage sooner, then you can revisit your loan by refinancing to a shorter term; as mentioned before, you’d pay more monthly for a 15-year loan than a 30-year loan, but you’d save long term and you’d pay off your mortgage sooner.

On the other hand, if you have unexpectedly increased your debt and it’s putting a strain on paying off your monthly mortgage (a unique circumstance), then it’s possible to refinance to a longer loan term so that your monthly payments aren’t as high.

Refinancing can be a good solution, depending on your mortgage loan, for your financial investment in a home. But there are some additional things to keep in mind of regarding refinancing:

  • It Costs to Refinance: Although it may help you save in the long run, or help give you financial room to breath with your monthly payments, you still have to pay the transaction costs to refinance just like you do when you get your mortgage loan for the first time, for example, closing costs. So when you plan to refinance, make sure you’re able to break even to make it worthwhile. A mortgage banker can help notify you of any refinance opportunities, and work with you to prepare for a refinance.

  • You May See Additional Interest Costs: You might spend more money all-together if you refinance to a longer loan term. This is the case even if your monthly payment is lower, since you’re extending the interest period (how long you’ll be paying interest).