Are you wondering if “this” is the right time to refinance your mortgage? You are unique, and so is your financial situation. Perhaps your financial circumstances have changed since you first took out your mortgage. Possibly you have changed jobs, and now you are working with a different budget.
The best time to refinance your mortgage is when you know that you are going to save money.
What is the right time to refinance your mortgage?
It is also possible that the economy has changed, or there has been a change in interest rates. Or, today, you might think differently about your mortgage than you did when you first took it out. There are many “good” reasons to contemplate a refinance.
Whether or not a refinance makes sense for you depends on a variety of factors. In this article, I want to share some fundamental refinance information to help you consider your mortgage refinancing options.
Is it worth refinancing my mortgage?
Refinance Your Mortgage with Better Interest Rates
As a home loan borrower, it makes perfect sense that you want the best possible interest rate. If you qualify for a better interest mortgage, it is logical to look into a refinance.
When you first agreed to the terms of your mortgage, your budget, goals, circumstances, and the economy might have been different. Verify the interest rate you are currently paying on your mortgage and research what rates would be available with a refinance. Lower interest rates make it cheaper to borrow. Even a slightly lower rate could have a big impact on the total loan amount.
Is it worth refinancing for half a percent?
If you can refinance with a mortgage rate that is lower than your current rate by 1% or more, it might be a good time to refinance. But, that’s a little bit outdated thinking. Just like when people think that you must have a 20 percent down payment to buy a house. Relying on such broad generalizations might be harmful when you need to make big-money decisions. Today, even a half-point improvement in your interest rate might be a big overall improvement.
If you are seriously considering a mortgage refinance, you might want to run the real numbers with a mortgage refinance calculator. You can easily calculate the potential savings. All you need to do is to add up the costs of refinancing, such as origination fees and closing costs, a credit check, and an appraisal.
Also, check with your current lender whether you face a penalty for paying off your current loan early. Then, when you know what interest rate you might qualify for on a new home loan, you’ll be able to calculate your new monthly payment and see how much money you’ll save each month.
Make sure that you have at least 20 percent home equity before you start with a mortgage refinance. Home equity is the difference between the market value or your home and the amount of money you owe on your home. You can check the property values in your neighborhood to learn how much your home might appraise for now or ask a local real estate agent.
Refinance if Your Credit Score has Increased
If you have been paying on your mortgage for several years, your credit score might be higher than it was when you took out your current mortgage. With a higher credit score, you might qualify for a substantially lower interest rate home loan. A better interest rate can help you save money every month.
Before you start with refinancing your mortgage, check your credit score. If you need to improve your credit because you have missed a few payments here and there, you might have trouble with qualifying for a refinance. To avoid any last minute surprises about your credit, get your credit report from all three credit bureaus.
Refinance if Your Monthly Budget has Changed
Budgets change all the time. Have you switched careers where you earn more? You might be able to pay more into your mortgage each month. Have you cut down your hours at work? If this is the case, you may be looking for ways to save each month. A change in your budget is an excellent reason to consider a refinance.
Refinance if You Want to Use Your Home Equity
Maybe you’ve reached a time in your life where you want to make a new investment, start a business or pay for a college education. Cash-out refinancing is one way to gain access to cash by using your home equity. You’ve worked hard to make your loan payments over the years, and now you might be able to use some of that cash and follow your dreams.
Do you have the home equity to refinance?
Home equity is a critical part of refinancing. Lenders usually require mortgage insurance if you have less than 20 percent home equity. Lenders require mortgage insurance because it protects their financial interests in the event you default. Mortgage insurance can be quite expensive. It is built into your monthly payment, so don’t forget to wrap it into your calculations of potential refinance savings.
How much money can I save by refinancing my mortgage?
You can expect to spend an average of 2% to 5% of the loan amount in closing costs. Before you commit to a mortgage refinance figure out how long it will take for monthly savings to recoup those costs. This is called the “break-even point” of a home loan refinance. For instance, it would take 30 months to break even on $6,000 in closing costs if your monthly payment drops by $200. If you plan on moving in less than 30 months, you’ll lose money in a refinance.
Do you think your current home will fit into your lifestyle in the future? If you are about to start a family or having an empty nest or looking for a new job, and you refinance now, there is the possibility that you have to move before you break even.
Once you have a good idea of the actual costs of refinancing, you can compare your “all-in” monthly payment with what you currently pay each month.
Real-Life Examples of Individuals Who Refinanced
Many homeowners have consolidated their non-mortgage debt – like Emily and James:
Emily from Richmond:
At the time of the refinance, her home was valued at $360,000. Emily had a home equity of $194,462. Her loan balance was at $165,308. On top of that, she had a non-mortgage debt of $20,151 at around a 16% interest rate. When she chose to refinance her mortgage, she was able to eliminate all of her non-mortgage debt, which equaled $622 a month. Her new mortgage payment was increased to $106 a month. That resulted in a total savings of $516* a month in comparison to her total payments before refinancing.
James from Tampa:
James is another example of someone who chose to refinance and ended up with a total monthly savings of $513* each month. At the time of the refinance, his home was valued at $545,000, and his home equity was $219,527, with a loan balance of $400,000. In addition, he had a non-mortgage debt of $41,589 at around a 19% interest rate. When he refinanced, his new mortgage payment became $180 less a month. He also eliminated his non-mortgage debt, eliminating $766* in monthly credit card payments.
Is there a time limit on refinancing?
There is no legal limit on how many times you can refinance a mortgage. You can refinance even if your current home loan is fresh. In most situations, you can refinance your home loan as often as you’d like. But, it may not worth refinancing your mortgage too many times.
Is there a waiting period to refinance?
The waiting period to refinance depends on the type of home loan you have. With many conventional mortgages, you might be able to refinance immediately after closing on the home loan.
- Some lenders may enforce a waiting period regardless of loan type. Check with your current lender to find out if there is a waiting period to refinance.
- No waiting period to refinance a conventional loan
- Six-month waiting period with a government-backed (FHA streamline and VA streamline refinance) home loan
How to Proceed With Home Refinancing
If you’re inspired by the real-life examples above and feel like a home refinance is the right option, here’s some information on how to move forward.
Start by speaking with your lender about your refinance options. Read the details and terms of the refinance carefully. Ask questions to make sure you understand every little detail.
What are the risks of refinancing your home?
Homeowners interested in refinancing their mortgage should carefully consider the risks. If you have already paid off a large amount of principal, you should think about the risks of refinancing. It is true that you can reduce your monthly payments with a refinance, but you are also extending your loan term.
If you have been in your home for more than ten years, refinancing to a new 30-year home loan tacks on interest costs. This happens because interest payments are front-loaded, and the longer you have been paying on your mortgage the more of your monthly payment goes toward the principal instead of interest.
What is the biggest risk of refinancing?
Many people refinance because they want to take some cash to pay off high-interest credit card debt. Credit card debt is unsecured debt, meaning it is a lot less risk for you. A mortgage is a secured debt, meaning that your home is the collateral. If you default on your mortgage, you could lose your home. So, when you refinance, you are potentially increasing secured debt with the possibility of losing your home.
When should you not refinance?
By researching and learning about mortgage refinancing, you can be one step closer to your ideal home mortgage.