Are you considering refinancing your home? If interest rates are low and you have equity in the home, then refinancing could be a good option. By refinancing, you may be able to reduce your payment, reduce your remaining mortgage duration, or even eliminate other debt, such as credit cards. Of course, refinancing may not be right in every situation. Also, there are a variety of ways that you can refinance, such as with taking cash out or by simply restructuring the terms of your mortgage. Before you decide to refinance or before you commit to a refinancing option, here are three big factors you need to consider:
Closing cost break-even point. Just like when you closed on your home the first time, your refinancing will have closing costs. These can include inspections, appraisals, attorneys' fees, title fees, and much more. Depending on the amount of the mortgage, your closing costs could total thousands of dollars. Paying those costs may seem to be worth it, especially if you'll be saving money on your payment or on credit card debt.
However, do a quick analysis to determine what your break-even point is. Divide the closing costs by your monthly savings. That will tell you how many months you need to stay in your home for the savings to cover the closing costs. If you're not going to stay in the house that long, it may not be worth it to refinance.
Consider the total payment. You may be able to dramatically lower your payment by refinancing for a full 30-year term. However, it's important to remember that also restarts the 30-year period in which you'll be paying interest. Instead, you may want to consider reducing your payment term instead of reducing your payment amount. If you can cut the term to 15 or even 20 years, you'll pay less in interest and may pay much less on the mortgage overall. Get the total payoff amount for each scenario and compare the difference.
Think long and hard about paying off credit card debt. If you're struggling with credit card debt, refinancing may seem like a no-brainer. That's especially true if you have considerable equity in your home. You can refinance for the home's full value and use the difference between the value and your current mortgage to pay off the cards. Since your mortgage is likely to have lower interest than the cards, this may seem like a wise idea.
However, remember that you are trading an unsecured debt for a secured one. If you don't pay your credit card bills, you'll get collection calls and your credit score will go down, but they can't take your assets. If you can't pay your mortgage, you could lose your home. Think through your budget carefully and consider whether you'll be able to cover the new mortgage payments on your home. If it will be a struggle, you may be better off looking at alternative methods to deal with your credit card debt.
For more information, talk to a refinancing specialist. They can help you decide which refinancing options are right for you. Speak with a business like Liberty Escrow Inc for more information.