Getting the chance to refinance a mortgage at a lower rate is usually, but not always, a sound financial decision. There are a few compelling reasons to refinance, but also some reasons why it may not be a good idea. Refinancing can cause financial harm, and if you do it repeatedly, you'll pay more than your share of closing costs. Before you decide to refinance, you should have a goal in mind, and you should also remember that a refi doesn't pay off a debt, it merely restructures it with different terms and a sometimes-lower interest rate.
Some people refinance their mortgage in order to consolidate other kinds of debt into one lower monthly payment. If you have a home equity mortgage and a first mortgage, putting the two together into one fixed rate loan makes for a lower average payment over the loan term. The ideal situation would be to refinance your current mortgage just once, and many people decide to refinance when they want to either get out of or into an ARM (adjustable rate mortgage). When interest rates are higher, homeowners flock to ARMs because they usually come with a lower initial interest rate than a 30-year note.
However, when interest rates are low, the difference between the ARM and the fixed rate loan isn't as pronounced, and homeowners will likely opt for the security of the fixed rate loan. When you have a clear idea of why you want to refinance your mortgage, you should also consider the circumstances and timing of your decision. In most cases, mortgage refinancing only makes sense if you plan to remain in your home for at least the term of the loan. According to national surveys, the average closing cost for a $200,000 loan is a bit over $3,000, not including insurance, taxes, or HOA dues.
When deciding whether or not to refinance your home mortgage, you should consider how many months you will have to pay on it in order to get back the money you paid out in closing costs. Here's an example: if you reduce your monthly payment by $150, you'll need to stay there and make payments for 20 months- almost three years- to get your closing costs back. Refinancing can either be a way out of debt, or it can get you in deeper, and you should do your research in order to find out whether a mortgage refinance can work for you.
