Should I Refinance or Just Pay Down the Principal?
Would you be better off if you just refinance, or will it be best to just pay down the principal?
With mortgage interest rates hovering in their record low 3 to 4% range, more and more homeowners cannot help but wonder if they should consider refinancing their mortgage. Shockingly, the availability of lower rate is just part of the equation. There are times when it will be better for you to apply your money to the principal balance instead.
Why Go for Refinancing?
When you choose to refinance, you will be paying off your existing mortgage loan then replace it with a brand new one. Your property which secures the mortgage will remain just the same because the change will only lie on the interest rate and terms on your new loan.
There are many reasons why homeowners choose to refinance. These include the following:
- Lower your payment
- Reduce interest expense
- Consolidate debt
- Shorten loan term
- Changes your type of loan
- Drop the mortgage insurance
If you are asking if you should refinance, the answer will depend on what you would like to achieve through re-doing the mortgage, and if refinancing will nail this objective.
When It May Not Be Wise to Refinance
Refinancing is only a great idea if it is going to do exactly what you expect it to do. For example, if you have to reduce your monthly payment by around $100 so you can pay for your monthly expenses, and this is something that you can do through a refinance, then, it might actually make sense.
However, if you want to decrease your overall expenses on mortgage, and refinancing will only add to this cost, you might be better off if you pass.
Select the Right Refinance to Suit Your Objective
When your goal is to reduce mortgage costs within the 4 years that you plan to stay in the property, a fixed refinance good for 30 tears might not be the right loan for you. Instead, you can opt for a 5/1 ARM with rate fixed for 5 years. You would be able to get the 3.75% rate at no cost but you will be paying less for a span of 4 years, allowing you to save money and lower your payment through refinancing.
Pay Down Your Principal Balance
There are times when it makes more sense that you use your money for refinancing to pay down the principal balance. For example, if you used your money of $5400 to reduce a $278,096 loan balance, in a span of 4 years, your remaining balance will only be $251,271. This is more than $1,00 lesser compared to when you choose to refinance.
Also, when you keep the loan for its lifetime, you will be able to pay this off 10 months sooner. This is definitely great if your goal is to pay lesser interest, or you want to repay the loan much sooner but you still want to reduce your payment.