Making the decision to refinance a home can sometimes feel overwhelming for homeowners. With so many variables and market forces outside their control, some homeowners may have difficulty figuring out when the best time is to refinance, and whether doing so is a wise move.
Fortunately, there are ways to simplify this choice — and they all start with an assessment of your personal goals. There will always be important factors to weigh alongside potential risks, but real life doesn’t work around mortgage rates. Sometimes, life circumstances may require you to consider refinancing now.
Let’s take a look at some of the best reasons to refinance.
1. Pay down your credit card debt
If you have hard-earned equity in your home, cash-out refinancing offers a great opportunity to take out money that can be put to great use.
Many homeowners decide to refinance because they want to pay down credit card debt. Credit cards typically have higher interest rates than mortgage loans, so cash-out refinancing offers a way to avoid steeper interest accumulating on this debt. The same can be true for other high-cost debt such as car payments, student loans and personal loans.
Converting your home equity with cash-out refinancing means replacing your existing mortgage with a new, bigger mortgage loan. At the same time, you receive a lump sum of cash based on the equity earned on the old mortgage. After closing, you’ll get the cash difference between the new mortgage loan and the balance that remained on the old mortgage.
2. Remodel, upgrade or make an addition to your home
Cash-out refinancing can also be a great way to fund home improvement projects to make your property both more valuable and better-suited to your personal needs.
Perhaps some of your home equity could go toward remodeling and renovating to welcome children. If your kitchen is outdated and needs new appliances, tapping home equity can be a good way to modernize the property, improving quality of life and making it more attractive in the event that you plan to sell the home at some point in the future.
The cost of an education can be steep. Cash-out refinancing can be used to cover tuition costs to avoid accumulating significant debt in the form of high-interest student loans.
3. Take out cash to fund college education
Do you have older kids getting ready for college? Are you looking to return to school for a graduate degree? Your home equity could be a lifeline to help cover tuition costs.
4. You want to pay off your mortgage faster
Some homeowners can benefit from shifting from a 30-year mortgage to a shorter, 15-year mortgage.
These shorter-term loans typically have lower interest rates, usually by a quarter-point to a whole point, and they allow homeowners to build equity more quickly. Paying off a mortgage faster means saving thousands of dollars in interest that would otherwise add up over a 30-year loan.
Of course, the key to switching to a 15-year mortgage is understanding that your monthly payments will be higher due to the shorter loan term. Homeowners must show that they can manage and sustain those higher costs. Sudden financial hardships can affect anyone and may make 15-year mortgages too risky for some borrowers.
If you are halfway through a 30-year mortgage, refinancing into a 15-year mortgage may lower your interest payments while still paying off the loan in the expected amount of time. Going to a 15-year mortgage is often a way to invest in the long-term value of the home as a primary asset — one that is likely to appreciate.
Making this type of switch involves thinking about the relative benefits of other long-term investment strategies. Homeowners should consider what they might otherwise do with the monthly savings of lower payments on a 30-year mortgage.
5. Access cash for long-term financial planning and wealth generation
Homeowners can leverage equity in order to pursue another endeavor that they expect will be profitable in the long-term.
Are you starting or expanding a business? Cash out refinancing could be an option to transfer useful capital into a growth strategy that will pay dividends in the future.
Similarly, home equity could be used to help purchase another property that may serve as a long-term rental that generates new income.
If you’re looking into your options to refinance, it’s a good idea to talk to an advisor who can help you evaluate how your personal finances can be put in the service of achieving short-term and long-term goals.
The best time to act is when rates intersect with the needs and possibilities in your life. Talking to a mortgage counselor will give you an opportunity to find that sweet spot and determine whether the numbers work for you after weighing risks and benefits.
Photo by Binyamin Mellish