To Refinance Or Not?

You know now is the time to refinance. Rates took a dip and there's a good chance the next move will be up.

Before you rush into a major financial decision, consider all your options. Refinancing isn't the right choice for everyone. And for those cases when it does make sense, there are many different reasons to refi your home loan. Understanding that now is a great time to refinance is only the first step. Do you know why you're refinancing?

I want to reduce my monthly payment.

Everyone loves saving money and improving monthly cash flow. When interest rates drop, many homeowners can refinance their loan at a reduced interest rate and reap the benefit of a smaller monthly payment. That extra cash can be diverted to paying down debt, saving and investing or maybe buying that new toy for your garage.

Be cautious. Just because your monthly payment goes down doesn't mean you're saving money. Most refinancings come with some closing costs that may or may not be rolled into your principal balance. And if you've already paid on your mortgage for a few years, starting over again — even at a lower rate — might cause you to pay more interest once the extra years on your new loan are added up.

I want to save money on interest and pay off my house faster.

Amen to that. One advantage to refinancing at a lower interest rate is the chance to reduce the number of years you'll be making payments. The 30-year, fixed-rate mortgage is one of the most popular. But paying interest over a 30-year window adds up. Big time. By refinancing to a 15-year loan, you'll not only make payments for half as many years, 15-year loans come with lower interest rates, too. Double win.

Just don't be surprised if your monthly payments go up. By shortening the amortization schedule (fancy mortgage term for the schedule of monthly payments over the life of the loan), you'll probably pay more each month. On the bright side, when you payoff that house, you'll have done so twice as fast and saved thousands upon thousands of dollars in interest.

I want to restructure my loan.

Low-interest rates like we've seen this year create an opportunity for homeowners to convert adjustable-rate loans into fixed-rate loans. Or vice-versa. Many borrowers with adjustable-rate mortgages decide they're in their home for the long haul. Converting to a low fixed rate will help lock monthly principal and interest payments at a set price going forward.

On the flip side, some borrowers will use the low-rate environment we're in to purchase or refinance at a low adjustable rate, planning to lock in a fixed rate later or even sell before the adjustable rate resets too high.

I want to get cash out of my home.

Low-interest rates can provide a good opportunity for the right borrowers to access some of their home's equity at a low cost. Maybe you want to renovate, remodel or tackle a big landscaping project. Maybe you need cash to pay down high-interest debt or consolidate bills. A cash-out refinance can be a good option.

Just remember, when you borrow against your home's equity it often increases the number and value of payments you'll make over the long term. It's wise to speak to a trusted adviser before borrowing against your home's value, even when interest rates make it cheap to do so.

I want to consolidate two mortgages.

Why pay two mortgages when you can just pay one? Many homeowners end up with two home loans. Maybe you financed your original purchase with two loans, a primary loan and a secondary. Or perhaps you decided to take out a home equity line of credit a few years ago. Either way, low interest rates might give you the opportunity to consolidate those payments and interest rates into a single mortgage with fixed repayment terms. Just remember: Debt consolidation isn't always the best route. Every situation is different. Speak to an adviser to make sure you've calculated the long term costs.

I want to get rid of mortgage insurance.

If you didn't have a giant down payment when purchasing your home, there's a good chance you're paying mortgage insurance every month. That's an additional cost, on top of your principal and interest, to secure insurance for your lender in case you fall behind on your payments and default. Mortgage insurance helps mitigate the risk of low-down-payment buyers and helps make homeownership more accessible. But it can cost some borrowers hundreds of dollars every month.

If your home value has been increasing, and your loan balance has been decreasing, refinancing may help you lower or completely eliminate those mortgage insurance payments. Most lenders want to see a loan under 80% of the home's value before eliminating mortgage insurance. With low rates, it's worth seeing if you can save some money.

No matter your situation, choosing to refinance your home is a big step. Think it through and weigh the short term and long term benefits. Refinancing can be an easy, simple process when you work with an experienced mortgage professional. Find one nearby and start the conversation.