March 3, 2014
When you refinance your home, you are basically paying off the existing mortgage and starting a new one. The general reasons that people consider this option are to free up money or to save money, but it isn’t always as simple as it sounds. Refinancing often involves penalties for paying off the original mortgage early, plus various fees to get the new one in place.
It is rarely a simple matter, and usually requires calculations and projections to determine if the reason you want to refinance is worth the costs it will take to get it done. If, in the end it costs more to refinance than you saved or made by doing it, then it’s easier to do nothing at all.
Here are a handful of reasons that people use when they want to refinance that are usually worth the effort:
Lower Interest Rates
If mortgage rates take a noticeable dip early on in your term, it stands to reason you’ll want to refinance. However, if you have 2 or less years to go, chances are it won’t make sense. The key factor when considering refinancing to get a lower rate is to factor in the penalties and fees to ensure you are still saving money. Sometimes, significant savings end up being mediocre savings once the fees and length of term remaining are considered.
Using the equity in your home from refinancing is often a good way to consolidate credit debt that has much higher interest rates. Even though a mortgage is the largest amount of debt you’ll likely have, the interest rates are lower than just about every other type of debt available.
If you refinance, you can pay off cards or lines of credit with double-digit interest rates, and move them into the mortgage, which has a low single-digit interest rate. The penalties would still be a factor and the overall mortgage amount would be higher once the credit debt was added on, but in the end you could still save thousands of dollars in interest from the cards.
Lose the Variable
Another reason that people choose to refinance their mortgage is to move from a variable mortgage rate to a fixed rate. If you decided to use a variable rate when you first got your mortgage because you thought the rates would drop during your term, but the opposite has happened, you’ll probably be interested in trying a fixed rate. With a variable mortgage rate, you are basically at the mercy of how the rates fluctuate, but with a fixed rate, you pay the same one no matter how high or low they go.
If projections indicated the rates would drop, but they went up instead, your monthly payment will also go up. You may also want consistency with your monthly payments so you can organize your finances more efficiently. Again, the standard fees apply when you refinance, but the savings may make it well worth switching.
Removing a Name
If you and your spouse purchased the home together, then decide to part ways, but one of you still want to keep the house, refinancing will help get the other person’s name off the mortgage. This is true of any co-owner whose name is on the mortgage, not just an ex-spouse.
Basically, you would have to apply for a mortgage on your own, get the approval and then you would own the house by yourself. This isn’t always as easy as it sounds, but it is possible and happens more and more as separation and divorce rates continue to rise.
College Tuition Fees
If your kids are ready for their post-secondary education, refinancing can free up the money you need to pay their tuition and get them through college or university. If you have owned your home for a number of years, you may be close to paying off the original mortgage, or already there. Either way, refinancing will give you the money you need to send them through school comfortably.
Home improvements can easily run up into the tens of thousands of dollars, depending on what you have done. A basic, bathroom, kitchen, rec room update isn’t cheap and refinancing can help you get it done and save in the process. If the projected cost of the home improvements you want to get done exceeds $25,000, consider refinancing as a way to pay for it.
You will pay the fees, but the interest you will save over a line of credit or bank loan will save you money in the end.
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