With all the mortgage loan offers in the mail, it can be confusing to a homeowner whether you should refinance your home or just start making extra principal payments on your mortgage. With some recent reading, I decided to write up this post to give you some guidelines. Decisions are best made with all the information you can get.
- Refinance versus extra payments. Important point: there are lots of reasons to refinance but the most important is to get a reduction in your interest rate. A homeowner should refinance to reduce the rate if the savings gained from the refinance will be enough to cover the refinance costs. Three important factors are how much of a rate reduction can you get, the cost of the fees you need to pay for the refinance and if you can shorten the life of your loan. Making extra principal payments is best regarded as an investment decision. The extra money would be invested in stocks or bonds but is used to reduce mortgage debt and earns the homeowner a return equal to the mortgage rate. Not to mention all the extra interest you will save by paying off the principal early. Decisions on whether to refinance or make extra payments should be assessed separately since they have different factors affecting their outcome.
- Refinance versus complete payoff. Here is a possible case where you may have some sizeable assets which you could use to pay off your mortgage or an opportunity to refinance at a lower rate. Advice suggests that you should pay off the mortgage loan if the return on your assets funding the payoff is below the rate on the new mortgage after refinancing.
- Refinance versus making periodic extra payments. This situation is two-fold. If you decide to refinance it may help you decide to forgo the extra payments. However, if you are still going to make the extra payments then shorten the refinance term to what would be reflected by making the extra payments and stop the payments. It is a balancing act that needs extra thought.
Whether you are interested in refinancing or making extra payments seeking the advice of a professional will help you make a decision that is right for you and your family.
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