Although you may find yourself overwhelmed by unpaid bills, if you own a home, you are one step closer to debt relief. Your home is your best investment, which you can use to get you and your family in the black financially after medical bills, credit card bills or unforeseen expenses leave you scrambling for available cash. It’s never too late to refinance your mortgage. Here are a few tips for getting the timing right.
What Is Mortgage Refinancing?
Simply put, a home refinance is when you find another lender to pay off your old mortgage and give you a new mortgage on your house. This extremely common and popular activity is a smart way to roll your existing debt into your home so that you can pay just one bill. There are two types of refi. A cash-out refinance will give you a new loan for your home, and then give you the cash for the equity you’ve built up. This is how many homeowners find debt relief. The other kind is a term or rate refinance. There is no cash exchanged here other than closing costs. The second term is simply negotiating a better term or rate on your mortgage.
Look at the Interest Rates
If you are able to reduce your interest rates from what you are currently paying on your mortgage, you will be saving money. Look for options that can reduce your interest rate by at least 0.75 percent, or ideally 1 percent. This way, you’ll be able to calculate how much you will save on your monthly housing payment. By choosing a cash-out refi, you could get cash in exchange for your equity. That could go a long way toward paying off student loans, vacations or other bills that are causing stress in your life. Of course, your mortgage may already be a low-interest fixed rate, meaning that the rate of interest will not change over the life of the loan. If this is the case, it may not make sense to refinance. Understanding what kind of loan you have will help you determine if refinancing makes sense for you.
Know the Closing Costs
It’s time to do a little more math! Once you figure out how much you will save with a lower interest rate, you will need to understand closing costs. Just as you did when you first purchased your home, you’ll have to pay for costs associated with the creation of a mortgage refinance. Make sure that you will be staying in your home long enough to come out ahead. You should be saving more in interest (both for your mortgage and any bills you will pay with the cash from your equity) than your closing costs in the long run. Some refinancing options will not extend the overall time of your mortgage. Talk with a financial representative to make sure you understand the terms of the new loan.
If you are planning on moving soon, the math may not add up. It really depends on a lot. What was your original interest rate, and what is your new proposed rate? If you are going to use your home equity to receive cash for debt relief, how much are you paying in interest for those bills? How much will you save if you pay those credit cards off, for example? Understanding how much you will save, compared with the costs of the process, will tell you how long you need to stay in your home. If you aren’t planning on going anywhere soon, it’s best to start work on your home refinance right away.