Homeowners always ask whether now is the right time to refinance their home mortgage. The answer to their question isn’t simple. It requires careful planning and you shouldn’t leave the details up to chance.
In this article, we’re explaining how refinancing your mortgage can be either a good or bad decision depending on your financial and living situations. While there isn’t a definitive answer to the question of refinancing your home, there are specific situations you will want to avoid.
Inputting your numbers into a mortgage calculator is perhaps the fastest way to understand what a refinance would look like for your financial situation. There is a multitude of free mortgage calculators available online and you should be able to take you to pick.
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When Does It Make Sense to Refinance Your Mortgage?
Most people start thinking about refinancing when they see mortgage rates decrease. However, that’s not the only reason you should consider refinancing. You can look to refinance your mortgage if you’re looking to pay your loan off quicker than the allotted time on your current mortgage.
If you have enough equity in your home you can also refinance so you don’t have to pay mortgage insurance. Lastly, you can use some of your home equity for a cash-out refinance. Each of these can be excellent reasons to refinance your home. They can also result in unexpected obstacles and backfire. The trick to deciding whether it’s time to refinance is to examine your reasoning first and then the circumstances that could affect your refinancing.
What Is a Good Mortgage Rate?
The Federal Reserve lowers short-term interest rates and people expect mortgage rates to follow. Mortgage rates don’t always coincide with short-term rates, so you should avoid focusing too much on how low you think mortgage rates will drop. Mortgage rates change daily and you shouldn’t place too much stock in them. You’re more likely to gain a competitive rate if you accomplish improvements on your credit score and you have a steady proof of income.
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Is It Worth Refinancing for a Half a Percent?
A commonly referenced rule of thumb is that you should refinance if you can decrease your current interest rate by more than a percentage point. Lumping refinancing into one catalyst and one outcome is similar to saying you need a 20% down payment to buy a house. It’s simply not true.
There are many safe ways to buy a home without a 20% down payment and there are other reasons why refinancing your current loan would be a great choice. Generalizations are nothing but generalizations and your particular situation should determine whether you refinance your loan.
One of the easiest ways to decide if refinancing is the right decision for you is to use a mortgage calculator. Mortgage calculators help you calculate the cost of refinancing and the future costs you can potentially save. If you plan to use refinancing to pay off your loan sooner than the loan term, you should check to see whether you would have a penalty for early completion.
When you find out the interest rate you could potentially qualify for, you will be able to calculate your monthly mortgage payment. Lastly, consider whether you have more than 20% equity. The more equity you have built, the less refinancing can hurt your financial situation.
Are the Savings Enough to Make It Worthwhile?
Remember, you’ll spend between 2-5% of your loan amount in closing costs, so you will need to figure this into how long it can take to recoup your monthly savings. This is also known as the “break even point” and homeowners who have already paid a substantial portion of their principal off should consider refinancing carefully before jumping in.
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Should I Change the Type of Loan I Have?
When asking whether you should change the type of loan you have, you need to consider the duration you plan to stay in your home, and the details about your current mortgage. Think about the details of your mortgage, such as the type of loan you have, your interest rates, and the duration of your loan. Is your current mortgage the best option for you?
For example, if you have an adjustable rate mortgage for an initial term of five years at 5%. If you are approaching the end of your initial term, you will want to consider the possibility of a refinancing. In most cases, adjustable rate mortgages increase after the initial term. When this happens, it might make sense to switch to a fixed-rate mortgage to avoid the interest rate hike.
On the other hand, if you know you’ll be moving in a few years, refinancing to an ARM from a fixed-rate mortgage might help you reduce expenses because lenders typically offer lower initial rates on these mortgages.
Examine What Changed Since Your Last Loan Closing
Lastly, and perhaps most importantly, you need to study the factors that have changed since your last closing period. Has your credit score or payment history improved since you got your mortgage? If it has, you might qualify for a better interest rate on a refinance. Conversely, if you’ve stumbled into difficult financial circumstances, you might want to hold off on refinancing until you can improve your financial situation.
In this case, you might want to wait to refinance until you reduce some of your debt. Make sure there are no mistakes on your credit report and repair your credit history. If you determine the amount you pay in credit card and other high-interest debt every month, you might discover that the money you spend on closing costs would be better spent going toward your debt.
When Is the Right Time to Refinance?
Choosing when to refinance your home loan doesn’t have to feel like a game of Russian roulette. There are specific questions you should ask yourself before refinancing, such as how much you could decrease your interest rate by, whether your credit score has increased or decreased, and how long you plan to stay in your current home. Answering these questions will give you a better idea of how much refinancing could improve your current mortgage situation.