Real estate can be a tricky business. When it comes to buying a home, it is important to make the right decisions. One important decision is deciding on the type of mortgage that you will use to purchase the home. While it might seem logical to choose the mortgage that offers the lowest rate, there are times when it might make sense to choose a mortgage with a higher rate in hopes of refinancing down later.
Benefits of Refinancing
Refinancing is the process of taking out a new loan to pay off an existing loan. When you refinance, you can potentially save money by taking advantage of lower interest rates or changing the terms of the loan. Refinancing can also be used to consolidate debt or free up cash for other purposes.
Why Refinancing Might Make Sense
In today’s market, it might make sense to buy a home with a higher mortgage rate in hopes of refinancing down later. This strategy can benefit you in several ways.
- Lower monthly payments: Refinancing to a lower interest rate can help reduce your monthly payments and save you money over the life of the loan.
- Shorter loan term: You can also choose to refinance to a shorter loan term, which can save you even more money in the long run.
- Cash out: If you have equity in your home, you may be able to refinance and take out cash for other purposes.
When Refinancing Might Not Make Sense
While refinancing might make sense in some cases, it is important to consider the potential drawbacks.
- Closing costs: Refinancing comes with closing costs, which could be as high as 5% of the loan amount. These costs can make it difficult to realize any savings.
- Increased risk: If you refinance to a longer loan term, you could be taking on more risk. A longer loan term means you will be paying more interest over the life of the loan.
- Fees: Some lenders charge fees to refinance, which could add to the cost of the loan.
Tips for Refinancing
If you are considering refinancing to take advantage of lower interest rates, there are a few things you can do to make sure you get the best deal possible.
- Shop around: Don’t just settle for the first offer you get. Shop around and compare rates from multiple lenders to make sure you are getting the best deal.
- Calculate the costs: Make sure you know what the closing costs will be and calculate whether it makes sense to refinance.
- Check your credit score: Your credit score will affect the terms of the loan, so make sure it is in good shape before you apply for a refinance.
Final Thoughts
Buying a home with a higher mortgage rate in hopes of refinancing down later can be a great strategy if it makes sense for your situation. However, it is important to consider the potential drawbacks and shop around to make sure you are getting the best deal possible.
