As with most real estate and finance decisions, whether or not you should refinance depends on your personal situation. Here are some things to keep in mind as you consider your options:
Interest rates are currently hovering around all-time lows, and we don’t know how much longer they will stay this low. If you currently have a mortgage with a higher interest rate than what you could get by refinancing now and you will still be ahead after accounting for the refinance fees, then refinancing could be a pretty good plan for you. If you pay even.5% less in interest each month over the time you keep the loan, you could save quite a bit of money.
Getting a lower interest rate will help you gain financial ground because you pay less interest to rent the lender’s money each year. If you get a lower interest rate and continue paying the same amount monthly, you’ll pay your loan off much faster. This approach creates a chain of other positive side effects. Paying your loan off faster means that you’ll have more equity in your property sooner, which makes it less likely that you’ll ever be “upside-down” on it in the future. Additionally, if an emergency happens in your life later, you can cash out the equity to help. If you keep your property until it’s paid off and you pay it off sooner, you’ll have a substantial increase in financial freedom sooner. Most importantly, these financial benefits also promote peace of mind, which supports quality relationships, good job performance, and physical well-being.
A lower interest rate may also mean that you can borrow more money for the same monthly payment. This is called a cash-out refinance. While there are cases where tapping into real estate equity through refinancing can be a wise choice, most of the time, it doesn’t lessen the financial stress in your life. In other words, if you get cash out, spend it, and keep the same monthly payment, you haven’t created the option to pay less. In contrast, if you refinance only your existing balance, the required payment will be lower than your current one. That can be helpful during troubled times or if you have retired with a fixed income. If the required payment is lower, you can still make the higher payment to speed up paying off the loan sooner.
Whether or not refinancing to lower your monthly payment turns out to help you gain financial ground in the long run really depends on what you do with the newly available money each month. Uses that will help you gain ground include investing toward future retirement, paying more than required on the loan to pay it off faster, or bolstering your emergency savings fund for the future. If you don’t use the savings on the payment to pay off the loan faster, you’ll be extending the time required to pay the loan off completely, which means you may be delaying the time you can experience the freedom of owning your home completely.