How to decide whether or not to refinance your mortgage

Are you thinking of refinancing your current mortgage loan with a new one? Are you a bit hesitant regarding whether or not it is a wise thing to do so? If yes, then you should know that you need to shop around and be sure that the new loan will help you financially, especially in the long run. Here are some points which you should consider while making the decision - whether or not to refinance your existing mortgage loan with a new one.

• Consider the break-even point - This is perhaps the best way to calculate whether or not it makes sense to refinance your mortgage. Divide the closing cost (or the amount you need to give in order to take out the new loan) by how much you’re able to save each month. It is advisable to take out a loan if you can break even by less than 3 years. And, no need to mention that it is better to not go for a refinance loan if the break-even period is long.
• Starting to repay the loan all over again - When you take out a loan with a fixed rate of interest, it comes with an amortization schedule following which you’re able to repay your loan within a fixed time period. Even if the monthly payment vary depending on the loan term you opt for, yet every month you make some payment towards reducing your loan amount. However, when you refinance your old mortgage loan with a new one, you start all over again with a new loan. Therefore, if you’re opting for refinance, make sure the required monthly payment is less than what you’ve been paying so long. Along with it, continue paying the same amount what you’ve been paying so far. It will prevent you from starting with a new mortgage loan all over again. By doing so, you’ll pay more towards the principal amount and accumulate more equity on the property, comparatively fast.
• Whether or not not the interest rate is lower - It doesn’t make sense to refinance your current mortgage if you’re not able to take out a loan whose interest rate is at least 1% lower than the current rate of interest. However, there are certain exceptions, which are discussed below:
  1. Lower principal amount - When you have already paid a certain amount on your mortgage, then when refinancing, the loan amount you’re taking out becomes much less; so, even if the interest rate doesn’t lower down much, your monthly payments will become comparatively less, keeping the loan term same.
  2. Lowering the loan term - Even if you’ve paid your mortgage loan for a long time, switching to a 15-year mortgage from a 30-year mortgage will be beneficial to you. It might have happened that you could not make higher payments on the loan when you took it out, but now you’re able to make a relatively higher payment and switching to a loan with a lower loan term will ultimately benefit you financially.
• Taking out a loan without paying any closing cost - It makes sense to refinance your mortgage with a loan slightly above the current market rate if you don’t have to pay any closing cost to obtain the loan. However, it is advisable that you try to take out a loan which is at least 1% lower than the interest rate on your current mortgage loan.
• Going for an ARM to lower rate meaningfully - It will not benefit you financially much if you opt for a mortgage loan that is slightly lower than your current loan, after you pay the closing cost. And, opting for an ARM (Adjustable Rate Mortgage) might seem like a fool’s option. However, you can opt for an ARM if the interest rates are significantly low; for example, about 2% less than your current one. Moreover, it will make more sense if you decide to sell your house by the time the ARM resets.

So, after analyzing these points, if you decide to go for refinancing, then make sure you manage the new loan effectively and utilize the saved amount to improve your overall financial position in the long run.