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If you’re considering refinancing your mortgage, it’s a good idea to first determine what you want to accomplish and if the timing is right.
There are various reasons people refinance including obtaining a lower interest rate, shortening the term of their mortgage (the number of years it will take to repay the loan), converting between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage, or consolidating debt. If you refinance to a lower interest rate you’ll build equity faster and enjoy a smaller monthly payment. Refinancing to a shorter term can be a good idea when interest rates are low. Your monthly payment may be similar to your current payment, but you’ll pay your loan off sooner. Converting between ARMs and fixed-rate mortgages may also be a good financial strategy depending on the rate environment. Consolidating higher interest rate debt into a low-interest mortgage is an option as well. However, it’s important to be mindful that the point is to control the debt and not to take on any additional high-interest debt after the refinance.
Timing is everything. Before you refinance, consider your long-term plans and take a look at the following questions. Do you want to stay in your home for several years to come, or do you see a career and location change in the next few years? Consider the break-even point or the time it will take for the mortgage refinance to pay for itself (break-even point = total closing costs / monthly savings). * What does your current mortgage situation look like? In the current rate environment, will it save you money to refinance? Take a look at your credit score to find out how it will impact your interest rate. Are you able to pay refinancing costs? Depending on where you live, your closing costs will equal about 3% to 6% of the loan’s principal.
If you plan to move in the near future, or if you owe more on your current mortgage than your house is worth, refinancing is probably not the best option for you. However, refinancing can be a great opportunity when it reduces your payment, helps you build equity more quickly, or shortens the term of your loan. For additional help in determining if refinancing is right for you, check out FORUM’s free mortgage calculators or call FORUM Mortgage at 317.558.6420.
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©2015 FORUM Credit Union