Refinancing is a smart move if you opt for it at the right time. This decision can make or break your finances and bring the benefits you aim for, such as better loan terms (lower installments, for example), shortening the repayment term, switching the interest rate types, etc.
Of course, committing to a loan under unfavorable conditions is not a dream come true. If you chose it because you didn’t have other options, you probably strive to pay it off as soon as possible or at least replace it with a more favorable arrangement.
Sure, refinancing options are made for that. But they’re not a universal solution for all situations. There are good reasons to refinansiering lån and seemingly good ones when switching loans might help, but only after you had a second thought of it.
Some problems can be solved with refinancing loans, but you might want to consider other options before that. If nothing works, you can always apply for some of the best deals out there. So here’s when you might have a second thought on refinancing.
It Might Cost You More
Refinancing has a good purpose if switching loans can bring you savings. What you strive for depends on your goals and financial capability. But somehow you should always think long-term, that is, assess how a new loan will affect your finances in the future.
For instance, you might need to lower your payment because you’re currently facing financial hardship. Then, refinancing may seem like an acceptable solution. This new lower installment can relieve the burden on your budget, so you need a loan with a low-interest rate and a long repayment period.
But don’t rush to do that at all cause. The short-term benefit of refinancing is a reduction in your monthly payments, but you should consider what that does to your finances as time goes on.
For instance, replacing one 30-year mortgage with another after just a few years just because of the lower interest rate makes sense if you can drop the interest rate for at least 0.5%. But what really pays off is refinancing to a new 25-year mortgage or even better, 20-year loan. The total cost of this new loan can be high, but it might be worth of earlier debt settling and long-term savings.
Switching to ARM
Among the valid reasons for refinancing, we mentioned changing an interest rate type. That refers to the possibility to switch the variable interest with a fixed one, but only when you do that at a favorable moment. This move may seem in vain because fixed interest rates are generally higher than variable interest, but in the long run, it pays off.
If your mortgage is with a variable interest rate, you pay fixed installments for the first few years, and then they change according to market trends. When this transition occurs, if interest rates are low, it’s wise to refinance the existing loan with a new one with a fixed interest rate.
But if the situation is reversed, i.e., you already have a fixed-rate mortgage and want to exchange it for a variable loan, think twice. Sure, when interest rates are falling, it seems like a good idea to cut your fixed installment, even though you could afford it without any problems. But hey, the extra savings don’t hurt.
But the future is unpredictable, and you never know what can lead to an increase in interest rates on a global level. At any moment, they can skyrocket, which will also happen with your adjustable-rate installments.
So, you might regret replacing your predictable payments with those tied to an adjustable interest rate. But keep in mind all those savings you can achieve when the APR drops even more.
Visit the following source to learn about the pros and cons of fixed and adjustable-rate mortgages:
Reaching Break-Even Point Takes Too Long
When deciding on refinancing, the break-even point is an item you have to think about carefully. It refers to the point from which the refinancing really pays off, that is, to the moment in the loan repayment when you finally recover closing costs and from which you actually start to realize savings.
The break-even point is easy to calculate, and you should do that for every loan deal. You should know how much the refinance closing costs are and how much savings the new installments would bring you. When you put that in proportion, you get the number of months you need to reach the break-even point.
Simple – if it takes you too long to break even, refinancing doesn’t make much sense. If you plan to move before then, you would get no particular financial benefits In that case, the better option is to continue paying the current mortgage.
But if you plan to stay in your home for a long time, refinancing makes sense, even if reaching break-even point takes too long. In that case, you might want to look for a fixed-rate loan and secure steady installment for the rest of the mortgage lifetime, so that nothing can surprise you.
To Invest or Start Business
The value of your property has probably increased since you bought it. Maybe that’s why you think tapping into your home equity and getting extra cash for investing and making even more money. The stock market seems like a good option, but starting a business is also an option.
Investing is a risky venture that can be profitable, but it can also bring you a lot of trouble. And refinancing your current mortgage because you need money to invest isn’t a good decision if you’re new investor.
In that case, you should invest in stock market with money that is really yours (for example, your savings) and only in the amount you can afford to lose in case of a market crash and the worst possible scenario.
Seasoned investors won’t gamble with refinancing either, but they’d know how to use the money from a cash-out loan in the best possible way. They can bear the risk, as they know how invest wisely and diversify their portfolios in order to ensure gains.
Get Cash for Non-Urgent Purchases
Many people think that refinancing a mortgage is a great way to get the money for spending on anything they want. And that’s partially true, but as seen on this page, there’s a list of really good reasons to opt for a cash-out refinance.
If you refinance a loan just to get the cash to spend on things that aren’t essential, that’s not wrong. You might have other options to pay for these things, but if you’re debt-free and want to treat yourself with a vacation or a new IT gadget, go for refinance loan. As long as it doesn’t interfere with your budget and quality of life a lot, you’re free to tap your home equity on a fancy car or a yard pool.
Many times, refinancing makes sense and brings benefits that can do wonders for your finances. But there are also situations when switching loans is not a good idea. If you find that refinancing won’t benefit you right now, you should delay that decision until a more favorable moment.