Home Refinancing Tips – When Should You Refinance Your Mortgage?

The 2008 financial crash has taught everyone a valuable lesson—borrow money only if you are absolutely sure that you can pay back the full amount in time. Many homeowners have made a huge investment out of their houses, but the taking out a mortgage on your property can be tricky. You have to be careful about making the right decisions or you’ll risk losing your home once you fail to make good on your monthly obligations.

The average US homeowner refinances the mortgage on his or her house every four years. There are many different reasons why homeowners opt for refinancing, such as paying off credit card debts, pulling some equity out of your house, doing major repairs on your house, taking advantage of lower interest rates or shortening the term of your loan.

Whatever your purpose might be for refinancing, you should first arm yourself with accurate information about various mortgage refinance options before signing a new loan agreement. Compare your current mortgage with that of your chosen refinancing plan to find out if you’re actually going to benefit from a new mortgage or simply putting yourself deeper in debt.

If you are wondering whether it’s time for you to obtain refinancing, check out this short list of questions to help you make the right decision:

1.       Are real estate prices going up in your area? Home values have been appreciating at an exponential rate all across the US, but the bubble burst two years ago. The economy is slowly but steadily on the rebound now, and prices are beginning to move up again. Your house might now be worth more than the appraisal value in your current mortgage, so obtaining a new loan might be a smart move.

2.       Do you need a big amount of money for an important expense? As your family grows, you need more and more space to store your things and keep everybody happy. Instead of moving into a new house, opt for cash-out refinancing so you can have ready cash for making the necessary repairs. A little home improvement project can even push your home’s value further. Some banks even offer special rates for home improvement equity loans, because these tend to give them a higher security for the original mortgage.

3.       Are you struggling to make your monthly payments? One of the main advantages of refinancing your house is the ability to extend the life of your loan and thus lower the monthly rates you have to pay.

4.       Have you built up more than 20% equity in your home? Your mortgage equity is the appreciation on the value of your property and the amount of the principal that you have already paid off. You can convert the home equity to cancel your mortgage insurance or get cash-out refinancing.

5.       Do you have other big debts to pay? Your resources might be spread too thin with the several simultaneous payments you have to make on top of your monthly instalments, such as hospital bills, school fees, car loans and others. Refinancing your mortgage can help you maintain gain a little more liquidity and manage your financial situation better. You can sleep better at night knowing that you have finished paying off a huge bill rather than having to stretch your money to accommodate all the monthly instalments simultaneously.

6.       Are loan interest rates rising? If you are currently on an adjustable-rates mortgage (ARM), any increase in loan interest rates is bad news for you. An ARM is usually more attractive because the initial rate and payments are lower compared to fixed-rate loans, but you might have difficulty meeting the newly-adjusted rates in the future. You can shift to a fixed-rate mortgage so that you won’t have to worry about fluctuating rates, or even to another ARM with a lower rate cap.

7.       Are you earning more now? If your take-home pay has improved considerably, you might want to consider shortening the term of your loan. While you will have to shoulder higher monthly payments, you can pay off the debt faster and save thousands of dollars on interest rates. Paying off your loan as quickly as possible gives you peace of mind and financial security.

8.       Has your credit rating improved? When you first took out a loan on your house, you might have had a bad or non-existent credit rating that has adversely affected the lender’s appraisal of your ability to pay. Now that you have a higher income and more substantial credit score, you can probably obtain better rates if you opt for refinancing.

Cathy is part of the team that manages Credit Card Finder, a complimentary credit card comparison service and a personal finance blog based in Sydney, Australia. Before she joined CCF, she was a staff nurse at Clark Airbase Hospital and conducted lectures on First Aid, Bio-terrorism and Disaster Management.