Refinancing – Freedom from Financial Woes?

The pros and cons of refinancing your mortgage: will it give you financial freedom or not?

As the housing market rebounds from the Great Recession, property values are increasing again. As that happens, homeowners are more often in a better position to consider refinancing their mortgages. Whether the existing mortgage had a high interest rate, an adjustable rate, there was no equity or a combination of these factors, many homeowners found themselves stuck in a mortgage that didn’t meet their needs during the recent Recession.

Is refinancing the right strategy for everyone? Probably not. There are pros and cons to refinancing a mortgage.

Pros:

  1. Lower monthly payments
  2. Lower interest rates
  3. Consolidation of debt
  4. Using the equity in the home
  5. Short term solution if debts are hard to manage

Cons:

  1. If there’s another downturn in the housing market, a refinance may put the homeowners in a negative equity position or upside down on the mortgage.
  2. With a debt consolidation, you’re putting short term debt into a long term commitment and most likely paying more interest over the life of the loan.
  3. Paying off credit cards with a refinanced mortgage only benefits the homeowner if they stop using the credit cards going forward.
  4. There may be costs involved with refinancing a mortgage.

Doing a cost versus benefit analysis before pursuing a refinance is the smartest way to help decide if refinancing is the best way to go. What will be saved versus the interest paid over the life of the loan?

First, decide what you want to get out of refinancing. If the goal is to save money in the short and long run, then proceed. Short term savings are realized with lower payments while long term savings come from paying a lower interest rate and/or shortening the term of the new mortgage. If the goal is to pay off other debt with a cash-out refinance using the equity in the home, it’s important to consider what the long term costs will be. Stretching a credit card balance into a 20 or 30 year mortgage may lower the payments and credit card interest rate but the amount of interest repaid over the term of the mortgage will be greater.

Next, determine your credit score and home value so you will know how strong a candidate you are to refinance your mortgage. Your credit score must be good to obtain the lowest rate and there must be enough equity built up in your home’s value to make the refinance obtainable.

Now, find out what programs are available from area lenders that fit your goals and needs. Compare costs, rates and terms to determine the best loan for you. Do the costs outweigh the savings?

If the refinance makes good financial sense, then go for it! If not, there are plenty of online tools to help accomplish your financial goals.

Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy.  For more information of classes in your area, go to either http://msue.anr.msu.edu/events or www.mimoneyhealth.orgMichigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.

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