Life is full of hiccups and happy accidents, any of which could change your financial situation in a way that makes refinancing a smart option. For some people, refinancing is a way to take advantage of rising property values, a bigger paycheck, or improving credit. For others, it provides a silver lining during a divorce, or even an escape route from expensive mortgage insurance.
Mortgage insurance is really a risk management tool used by lenders; unlike home insurance, it doesn’t protect the homeowner so much as it helps them qualify for a loan in the first place. Many homebuyers find that paying insurance on their mortgage is worth it to get into the home sooner. Others may have gotten an FHA loan that requires mortgage insurance as a condition to avoid paying money down. But in any case, the extra fees on top of a monthly mortgage and can really add up, especially over the life of a 30-year loan. Refinancing can reduce or eliminate these payments.
If you and your partner originally purchased your house together, you may have a shared debt obligation that will need to change as you go through a divorce. Although there are potentially other options to remove a spouse’s name from the mortgage, refinancing is one of the standard ways to do this. Depending on your personal financial profile, this could end up being a silver lining to your separation, as the new terms may carry a lower interest rate, or the timing work out to refinance into a shorter loan term. For some, though, this is just a legal necessity to reflect a change of marital status.
It can be a pain having to manage multiple accounts to multiple creditors, cutting them each a separate check every month, and possibly struggling to get past the interest burden that each debt carries. Before things get out of hand, you might consider refinancing your mortgage as a way to consolidate all of your debt into one account, to which you can then make simpler monthly payments toward. Mortgage rates are often competitive with credit card interest, auto loans, and other common forms of consumer debt, which makes debt cheaper as well as easier to manage. But make no mistake: the debt is not gone, it is just all concentrated in one place. Many financial experts advise against this, on the basis that people with poor money management skills will struggle with debt no matter how streamlined they make it. If you have the discipline and a solid plan to meet your obligations, however, this can provide peace of mind as well as long-term savings.
If refinancing is unavoidable (because of a divorce, for example) that doesn’t mean you can’t come out ahead. You will still want to calculate what you can afford to pay every month, whether you can switch to a shorter loan term, and what is the lowest rate you can qualify for.
Likewise, if you are looking to eliminate your mortgage insurance, make sure you are aware of any prepayment penalties (for paying off the mortgage early) to avoid extra fees.
If your goal is to consolidate debt, you will have a lot of extra paperwork to sort through in addition to the new documentation required for a mortgage application. The more you can do in advance, the better chance your lending agent will have of being able to help you get the best possible terms.
Whenever you refinance, you should have the option of paying points at closing. This is essentially just money you pay upfront to reduce the total principal amount of your loan. Each point comes out to 1 percent of the mortgage amount, so the cost is unique to your situation. Whether this is a worthwhile investment really depends on why you are refinancing in the first place. Up to a certain level, these points may be tax-deductible, or may be used to lower the interest rate on your loan. However, it also means paying more money down on top of your closing costs. You’ll want to take a thorough look at your current financial status, as well as your long-term goals, to decide whether you need that money in hand now, or can afford to make it up by realizing the savings over time.