When Should You Refinance Your Mortgage?

If you have a mortgage, you can refinance it to get proper grip of your finances. You should only refinance a home mortgage when it will give you more financial flexibility or help you save.

Types of Mortgage Refinance
There are two main types of refinance mortgage. These are rate-and-term refinancing and cash-out refinancing.

i) Rate-and-term refinancing will help you save money. With this option, you generally refinance your remaining balance for a term that you can afford and a lower interest rate. The term refers to the number of years you will have to pay back the loan.
ii) With cash-out refinancing, you take out a new mortgage for more than your existing balance and use the extra cash to pay off your existing debt.

You can also take out refinance mortgage for other reasons, including: to eliminate mortgage insurance, settle a divorce or replace an adjustable-rate mortgage with a fixed-rate one.

Breaking Even
The closing costs of a mortgage can be thousands of dollars. Therefore, you should know whether refinancing makes sense before going ahead with it. To do this, determine the break-even point i.e. the time it will take for the mortgage to repay itself.

An easy formula of calculating the break-even point is to divide the total closing costs by your monthly savings.

You will benefit from refinance mortgage if you plan to keep the house for more than the break-even time. Click here for more information.

Consider the Term in Rate-and-Term
When calculating the break-even point using the above formula, we did not measure your total savings over the life of your new mortgage. If you start your new loan with a 30-year team, you may end up paying more in the long run for the mortgage.
Therefore, you should research well to know the true savings you will be getting by refinancing your mortgage. Use online mortgage calculators to find out how your monthly input will affect the term of the loan. Also, check the amortization schedule to know how much interest you will pay.

Having good credit can help you save thousands on your mortgage. You should repair your credit score before taking out refinance mortgage.

Cash-Out Refinances
You can use cash-out refinance to pay down debt. This type of financing has its pros and cons. For example, if you are using the refinance to pay your credit card debt, you are in effect reducing the interest rate on the debt. On the other hand, you may end up paying thousands more in interest if you take up 30 years to pay off the balance transferred from your credit card to your mortgage.

The biggest risk of using cash-out refinance to clear your mortgage debt is transferring an unsecured debt into a secured one. The home equity that was added to the refinanced mortgage was secured debt. Failing to pay your credit card debt on time will negatively affect your credit score. Apart from this, you may have to deal with calls from nasty debt collectors. Moreover, if you miss your mortgage payments, you can lose your home to foreclosure.