With mortgage rates on the rise it’s less common to refinance your mortgage. However if you have specific goals in mind, you may be considering it to do something like paying off your home faster. With that being said, let’s take a look at the benefits and downside of refinancing your mortgage so you can decide if it’s the right choice for you right now.
Pros of refinancing your mortgage
First of all let’s talk about the reasons you might want to refinance your mortgage early.
Decreased monthly payments
One of the most common reasons to refinance a mortgage is the need for lower monthly payments. With mortgage rates rising, some people who maybe got a little too much mortgage for their budget are finding it hard to meet their monthly payments. In a mortgage market where rates are decreasing, this is relatively straightforward. Refinancing with a lower rate will likely decrease your monthly payments. The other way to decrease your monthly payments is to increase the length of your amortization. If you refinance over a longer time period you can reduce your monthly payments at the expense of a longer amortization period.
Better mortgage rates
One of the most common reasons to refinance your mortgage is when rates have significantly decreased since you borrowed. Typically it’s advisable to refinance when mortgage rates have decreased at least 2% or more from when you took out your mortgage. After mortgage penalty costs, which you can calculate here, you’ll likely end up saving money when all is said and done.
Decreasing your interest costs
If you refinance at a time when lower interest rates are available (usually at least 1% lower than your current rate), then it’s likely you’ll be able to decrease your total interest rates over the life of your mortgage. Unfortunately when interest rates are rising, this isn’t possible. The other way to decrease your total interest is to decrease the length of your amortization. If you refinance to a shorter amortization, like say going from 30 years to 20 years, your monthly payments will go up but you’ll end up paying less interest over the life of your mortgage.
Paying down your mortgage faster
Like previously mentioned, refinancing your mortgage to a shorter amortization period will result in increased monthly payments but less overall interest paid as you pay off the loan faster. For some, the peace of mind that comes with having your mortgage paid off can be worth the increased payments in the short term. If mortgage rates are higher than the expected returns of your investments, you might also want to pay down your mortgage faster than you originally planned.
Cons of refinancing your mortgage
It’s not all good news however, and there are a number of reasons you might not want to refinance your mortgage at the moment.
First of all, the fees. When refinancing your mortgage there are a number of significant fees to think about, and you should be sure to calculate how much you’ll end up paying to determine if refinancing is the right decision for you. You can calculate your mortgage penalty costs here, which includes the costs of breaking your current mortgage early, but there may also be other closing costs like legal fees.
Increased mortgage rates
If you refinance in an environment where interest rates are rising, you’ll inevitably end up with a higher rate than when you started. The increased rates could put a significant strain on your monthly budget. On the other hand you might be refinancing to a shorter amortization period to pay off your mortgage faster.
Increased monthly payments
Of course the biggest downside of refinancing to a higher interest rate, or to a shorter amortization period, is that your monthly payments will be higher. If your budget is under stress and you’re worried about affording your monthly mortgage payments, refinancing might not be the right decision for you.
So obviously, there are benefits and consequences of refinancing your mortgage, and ultimately whether you do or don’t refinance will depend on your specific circumstances. If monthly payments are your main concern, you may decide to refinance to a longer amortization period to ease the strain on your monthly budget. Alternatively you might be refinancing to a lower amortization period to pay down your mortgage faster if you believe you can get a better rate of return on your investments than your interest rate on your mortgage. Make sure to evaluate your situation thoroughly before making a decision, and if you’re looking for the best rates on the market, look no further than Perch.