New Year Financial Resolution: Refinance

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Another year is drawing to a close, and that means it’s resolution time! Many people tire of making resolutions that they will not keep, but the good news is that you can actually make at least one financial resolution that is relatively easy to accomplish: Refinance your home.

Even though mortgage rates are starting to creep up a bit, the fact of the matter is that they are lower than they have been for years. Mortgage rates are still near historic lows, and that can mean that you might be able to refinance to a lower rate — and lower your home mortgage payment. (The rule of thumb is that you should refinance if rates are at least 1% lower than you are paying right now.) This can save you money right now, and it can also save you money in the future, since a lower mortgage rate means you pay less in interest overall.

But you have to be smart about your refinance.

Things to consider when you refinance your home

The problem many people run into when they refinance their homes is that they either lengthen the loan term or they get a “cash out” refinance. Both of these options can be more costly in the long term. If you plan to refinance your home, consider taking these steps to ensure that you really are improving your financial situation through a refinance:

Do not cash out: If you are one of the few people left in this country with a significant amount of equity in your home, do not cash out. Many mortgage lenders will try to get you take out a little cash for vacation or to pay off credit card debt. This can be tempting if you owe $150,000 on your home, but have $200,000 in equity. You can refinance $180,000, and end up with $30,000 cash. But you will have to pay it back. And if you use it to pay of your credit cards, you’ve just taken unsecured debt and secured it with your home. And do you really want to be paying off that vacation (with interest) for the next 15 to 30 years? Do not extend your loan term: If you have only 15 or 20 years on your mortgage loan, don’t extend it out to 30 again when you refinance to a lower interest rate. Instead, get a 15 or 20 year loan. You might even find that you get a still-lower interest rate for the shorter term. Unless you have run into some sort of financial trouble (like a job loss or some sort of medical catastrophe), try to avoid extending your loan term. Refinancing to a lower term, at a lower rate, will save you more. Remember the tax advantages: In some cases, if you pay points when you refinance, you can get tax advantages. Additionally, you will still get a mortgage interest rate deduction after you refinance.

In the end, refinancing is really about your individual situation. You should carefully consider your options, and decide how you can best help your situation and improve your finances. You might even consider consulting with a financial professional (since I’m not one). With a new year coming, it is a good time to review your financial situation, and decide whether or not you will be well-served by setting a goal to refinance your home before rates start moving significantly higher.