When to Refinance Your Home
Over the past year, the housing market has set records that have never been seen before in history and that includes record low rates. There is an old adage in the mortgage business that states that if you can improve your interest rate by at least 2 percentage points, then it is a good time to refinance. While that may work as a general rule of thumb, the truth is that there are many reasons to refinance. When you are trying to decide if now is the right time to refinance, the first thing you should ask yourself is how long you plan to stay in your home. Weigh the costs to refinance against your monthly savings and future goals by calculating your break-even point.
How Much Does It Cost to Refinance a Mortgage?
Your refinance savings could be significant if you plan to stay in your current house for a long period of time and a refinance gets you a better interest rate and/or a shortened term. However, if you’re moving in a couple of years, it might not be worth it. You can expect to pay few thousand in closing costs and refinancing fees, so you’ll want to consider how much you’ll have to pay in closing costs and compare that with how much the refinance could save you over time.
For example, if refinancing your loan with a new lender costs $5,000 upfront, and your new monthly payment is just $100 lower than what you’re currently paying, you’ll need to stay in the home at least 50 months to make the move worth it. Also, watch out for things like prepayment penalties, which can cause problems down the road if you pay off the mortgage early or refinance again.
How Does a Refinance Work?
Refinancing a mortgage involves taking out a new loan to pay off your original mortgage loan. The process of refinancing a mortgage is similar to the process of getting one in the first place. You typically start by shopping around and comparing interest rates and other terms with various mortgage lenders to see which has the best offer. Then you compare that offer with the terms of your existing loan.
Why to Refinance a Mortgage
When considering a refinance, here are 5 beneficial reasons:
1. Lower your interest rate.*
Securing a lower interest rate is one of the top reasons for refinancing. This can make a big difference in your monthly out-of-pocket costs for housing and save money on financing fees.
2. Build equity faster & change your term.
If you are in a position to make higher monthly payments due to an increase in salary or other good fortune, you may want to switch from a 30-year loan program into a 15- or 20-year loan structure. This enables you to build equity faster and save a tremendous amount of money on financing fees. This enables you to shorten your term and pay off your loan sooner!
3. Change your loan program.
Some homeowners who start out in an Adjustable Rate Mortgage (ARM) find that they would like to switch to the stability of a Fixed Rate mortgage at some point. An ARM may have been the most attractive rate and loan package when you first financed your home, but we can provide you with loan comparison charts to find out if you can save money with another type of loan program that might work better for you right now.
4. Credit score has improved.
If your credit score has improved as a result of making your mortgage payments on time and in full, you may be in a position to take advantage of your improved credit standing. We can review your current credit score, the terms of your existing mortgage, and review options for other loan programs that could not only reduce your monthly payment, but also save you money on interest fees paid over the life of the loan. This is also a great way to eliminate or reduce your monthly PMI (private mortgage insurance) if you were unable to put a 20% down payment on your home at the time of purchase.
5. Use the equity you have established.
A cash-out refinance allows you to tap into the equity you have built up in your home. You may want to pay off revolving credit card accounts, send a child to college, or use the money for home improvements or personal expenses.
Regardless of your reasons for wanting to refinance your existing mortgage, we are always are interested in helping you make a decision that works best for you. We present our clients with information regarding the various programs available. We will continually monitor rates and alert our clients of interest rate changes to inform them of the best time to refinance. Many homeowners refinance their mortgage at some point during the life of the loan (even more than once), for a number of reasons that put them in a better financial position.
Call us to find out if your current loan qualifies for one of these programs and to see if you can take advantage of a refinancing opportunity.