Mentor Article

When is the Correct Time to Refinance Your Home?

Shaun Corbin, First Minnesota Bank

At First Minnesota Bank I get the opportunity to offer all types of loans.  One of the loan types I want to discuss is the residential home mortgage refinance.  The big question is–when is the correct time to refinance your home?  The answer depends on what you want to accomplish or what financial goals do you want to obtain.  In my opinion, there are four main reasons to refinance

1) To lower your mortgage payment or consolidate debts to lower overall monthly obligations.  This may be needed for cash flow purposes and/or to payoff higher interest rate debts.  The positives can be lower monthly payments and higher interest rate items will be paid off.  The one negative with this strategy is you are usually pushing out your debt to a longer term, meaning you are paying more interest in the long run on certain debts.  A great idea after lowering payments is to re-look at your company provided investments, such as a 401k to make sure you are taking advantage of company matches.

2) Lower the total payback of your mortgage debt.  This is where you want to reduce your term or payback of debt.  The long term interest reduction with this option can be very eye opening and I recommend that borrowers at least take a look at this option.  15 year rates are usually lower than a 30 year, which is another benefit for the refinance.  The hardest part with this option is a possible increase to the payment, so borrowers will need to make sure cash flow is adequate.

3) Lower interest rate.  Taking advantage of a lower interest rate can reduce your overall interest cost over the length of the loan making it a smart financial move.  However, closing costs and pushing the loan term out may not be the best financial move to just lower the rate.  You may want to combine the lower rate with refinance reason #2 above.

4) Cash out.  Using your home to access cash for home improvements or other purchases can be a good reason for a refinance.  Once again, you will need to look at your financial goals to see if this is the best option to obtain the cash you need.

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