When Should You Refinance Your Home?
Buying a house can be tricky. Sometimes, you find yourself stuck at a bad rate and spending more money when you should be saving money, especially when you have other life goals you are trying to reach. If you are ready for a change but not a move, it may be time to refinance your home.
What Is Refinancing?
The goal of refinancing is to get a lower interest rate. When you have a lower interest rate, often your monthly payment is lowered. To do this, you pay off your existing mortgage with a new loan. This new loan will reset your term, allowing you to make payments for a different period of time. When you choose to refinance, you can also borrow more funds from your home’s equity. These funds can be used for your next home improvement project.
When To Refinance
When is the right time to refinance? Usually, you want to refinance when you have one of these situations occur:
- Lower interest rate. When mortgage rates drop, you should consider refinancing. Especially if your current mortgage rate is much higher. Refinancing to a lower rate can help you save money and make smaller monthly payments.
- Update your loan term. If you have your eyes on the prize to pay your mortgage off as soon as possible, you may want to consider changing your loan term. If you start with a 30-year term and make the monthly payments, it will take you 30 years to pay off your loan. If you refinance to a 15-year mortgage and make the monthly payments, you will have the deed to your home in no time. Keep in mind, that when you decrease your term length, your monthly payment goes up.
- Adding or removing a borrower. If you recently got married and have your new spouse move into your home, you may consider adding them to the mortgage. Or, the opposite, you may be facing a divorce and need to remove your ex-spouse from the mortgage. Both of these are accomplished by refinancing your home.
- Taping into home equity for financial goals. A cash-out refinance swaps your present home loan with a new, bigger mortgage that allows you to take out the difference between what you need to pay and the value of your home.
- Switching from an ARM to a fixed-rate loan. ARM loans, or adjustable-rate mortgages, are what they sound: adjustable. The interest rate can move up or down, and you never have it really locked in. If you have noticed that your ARM interest rate keeps rising with no sign of coming down, it may be time to refinance to a fixed-rate loan and get better control of your budget.
- Drop FHA insurance. First-time homebuyers are eligible for FHA loans. As part of FHA loans, loan borrowers want to ensure they can make payments by tacking on premium mortgage insurance, or PMI. This addition to your monthly payment is repaid over the term of your loan. Yet, once you reach 20% equity in your current home, you can refinance to drop the PMI completely!
Show Me The Numbers
Before you decide to refinance, let’s look at the cost. Typically, refinancing your mortgage costs between 2-6% of the loan’s amount. So, if your loan amount is $300,000, you could be looking at $6,000 to $18,000 in closing costs.
Some lenders offer a “no-closing-cost-refinance” option, so you don’t have to pay those closing costs upfront. Instead, the lender pays the fees at closing on your behalf. Although, there’s a catch. If a lender covers your closing costs, they will likely charge you a higher interest rate to get those expenses back from what they are paying for you at closing.
When you want to refinance, ultimately, it is your decision to make. If all the signs are right for you, then find your closest financial institution ready to help you through the process!