Enhancing your financial condition by wisely refinancing your home loan can be beneficial, but it’s not the best choice for everyone. If you’re mulling over this option, it’s essential to ensure it fits your current context and your near- to medium-term financial aims. My guide will help you consider if this potentially beneficial but not-so-universal move fits your situation.
1. Review Your Current Mortgage
Begin with a close look at your current mortgage. Examine its interest rate and term, as well its prepayment penalties, if any. Clearly understanding these aspects of your current loan will provide a solid foundation for determining whether refinancing could present more potential benefits than costs.
2. Calculate Potential Savings
Refinancing home loan usually serves one of two main purposes: to lower the interest rate and/or to lower the monthly payment. For many folks, even a slightly reduced interest rate can have a significant impact on the strain felt when writing out that monthly payment. Interest that was avoided, or principal that was paid down, had to come from somewhere. In doing the refinancing “math,” you will be looking closely at whatever instruments the current loan uses to see if the new use of terms, or instruments, redeems what you owe in a way that is more favorable to you.
3. Review Your Finances
Review your finances. Look at your credit score. How stable is your income? What debts do you currently have? A high credit score and a stable income make it much more likely that you will win a favorable interest rate when refinancing. But also consider, “Can I really afford to do this?” Figure in the costs of refinancing, which include application fees, appraisal fees, and closing costs, to your budget. When I factor in these costs, I find these savings will about cover them. But if I stretched my budget unsure of my income’s stability, I’d be making a bad gamble and risking my financial health.
4. Calculate the Break-Even Point
Calculate the length of time required for the savings from refinancing to offset the costs of the operation. This is called the break-even point. If you expect to remain in your home any length of time past this point, refinancing might make sense. Consider this decision carefully.
5. Consult with a Professional
Speak with a mortgage broker or financial advisor. “Elongate” the process in your mind so that it doesn’t feel as if you’re hurriedly pushing the refinancing button. If you have recently experienced or expect to soon encounter substantial changes in your home life or in your financial life, then don’t refinance.
A home loan can be an instrument of real financial leverage and a means of achieving true financial breadth. But what happens if the terms of that loan suddenly become unfavorable and you find yourself needing to change them? What are your options? And how do you take meaningful action when it comes to an instrument that is fundamentally so long term and so tightly bound to the life of the asset in question—your home? These are the questions we aim to answer here. And what we won’t do is obfuscate.
