It may not be smart to refinancewhen mortgage rates are on the march, especially when you’ve got your original mortgage at a historically low rate. Should refinancing then be an off-limit for borrowers in 2017?
Actually, there might be an exemption to this. If you have been paying your mortgage for many years, preferably close to halving your amortization time, refinancing to a shorter term, 15-year refi could make sense. This is even more beneficial if you are one of those homeowners who were able to increase their equity (and correspondingly, their loan-to-value ratio) because of the current rise in home prices.
If you are currently carrying a 30-year fixed-rate mortgage, refinancing to a 15-year mortgage not only allows you to pay off your mortgage debt faster; it also gives you a lower interest rate.
Interest on 15-year, fixed-rate mortgages are typically about 0.75 of a percentage point lower than that of 30-year FRMs. This may not seem like much but could amount to tens of thousands of dollars when calculated on account of the difference in amortization.
The Benefits
If you already have a 15-year mortgage as your original loan, it might be wiser to keep it. But if your mortgage runs on a 30-year amortization, refinancing to a 15-year mortgage have more chances of giving you the following benefits:
- Getting rid of mortgage insurance. If you have 20 percent or more in your home equity, you can eliminate paying for a private mortgage insurance when you refinance.
- Tapping into your home’s equity.As has been said, if you cash-out on your adequate home equity, you can use this money to increase your cash flow, fund for home improvements (and increase your home value), medical emergencies, or other unexpected expenses.
- Consolidating debt.You may also use the proceeds of your cash-out refi to consolidate your credit card debts or use your equity to wrap your HELOCinto a single mortgage with a 15-year term.
- Preparing for retirement.If you are approaching retirement and do not want your golden years to be burdened with the problem of debt, you can refinance to a shorter term and resolve your debt issues faster so you can settle into your retirement years with peace of mind.
The Drawbacks
Refinancing to a shorter term, 15-year mortgage may not be for everyone, however. Most of the time, a shorter refi could result to a higher monthly payment and may leave you less flexible to adjust to sudden tight financial changes. If you ever consider getting a 15-year refi, be sure that the resulting arrangement would be beneficial or at least manageable for you in the future.
