You’ve moved into your new home, paid off the mortgage for several years, and wonder if it is the right time to refinance your loan. Many homeowners think about this too, so you are not alone!
Refinancing can help you achieve different goals as you can save money on interest, and even pay off the loan sooner. But should you be refinancing now? Here’s a quick guide that can help make the decision!
The right time to refinance a mortgage
Refinancing a mortgage may not always be what you need right now, especially because the process requires some money and time.
So, how do you know if this is the right time to refinance? We think you should refinance your home mortgage when:
You want a lower mortgage rate
The number one biggest reason for refinancing is to get a lower mortgage rate. This is because you are replacing the entire loan agreement when you refinance, which can certainly be beneficial.
Let’s say you started with a 30-year loan at 4.5% a couple of years ago, but you have been checking that the recent rates can give you a new 30-year mortgage at only 3.25% interest. This means you can save more on interest and lower your monthly payment at the same time.
In this case, it can be a great idea to refinance your mortgage.
You want to pay off your loan faster
If you want to maintain the same monthly payment and benefit from the lower interest rate, you can easily use it to shorten the terms. So, you can pay off your loan faster.
Even if you need to pay a higher monthly payment, shorter terms like a 15-year loan will save you plenty of interest money in the long term. So, if you are able to, this can be a good reason to refinance!
Your financial situation has improved
Your credit score when you first applied for the mortgage would have affected the interest rate and terms you can get. Let’s say that your finances have improved since then, and you now have better credit score and DTI ration.
That can be the right indication to refinance your loan. With better finances, you can change your loan with better terms now. This includes a lower mortgage rate that can help you save money too.
You want to cash out your home equity
Finally, it may be the right decision for you to refinance when you want to tap your home equity and get some cash. With a cash-out refinance, you can achieve unprecedented goals like a home improvement project, college fees, or a dream vacation.
The only requirement is that you need at least 20% of equity, which means you can’t cash out the entire amount of your home value.
Should you wait before refinancing your home?
There are some cases when a mortgage refinance may not be the best decision for you now. This includes when you are planning to move soon or have a bad credit.
So, when should you wait before you decide to get a refinance?
· You are selling your home within a few years
If you plan to move and sell your home soon, it makes no sense for you to refinance now. Especially because the benefit from refinancing may not be enough to cover the closing costs. You may even lose money, which isn’t a good idea.
· You have almost completed your loan
Let’s say you are close to repaying your existing mortgage. Then, there is no reason for you to refinance the loan. It will give you new terms that might be longer, and you will only be paying more in interest. We would recommend sticking with it for a couple more years until you pay off your home loan.
· You have a low credit score
If you are already struggling with your finances and have a low credit score, it may not be the best idea to be refinancing your home loan. At least not until you bump up your credit score or find a good deal. This is because you might get a higher interest rate that will only burden you in the long term.
· You have other financial goals
Don’t forget that refinancing takes money and closing costs can be quite hefty. So, if you have saved up for other goals like an emergency fund or other debts with higher interest rates, it can be wiser to prioritize these.
· You might be charged with prepayment penalty
A prepayment penalty is when the lender charges you for paying all or a portion of your loan within the first few years. This is because they want you to pay off the mortgage slowly and allow them to profit from the interest.
When you refinance, you’ll use the new loan for your old one. Make sure to do some calculation beforehand and check if you will face a prepayment penalty by refinancing.
Questions to ask before a mortgage refinance
Before starting your mortgage refinance process, here are some questions you can ask yourselves:
1. How long do you have left on your current mortgage?
As we’ve mentioned earlier, your loan terms can be a great factor to consider before refinancing. Do you still have 20 years left on your 30-year mortgage loan? If so, know that you will be starting over the amortization schedule and therefore be paying more interest overall.
Instead, it can be better to refinance your home loan into a shorter term. A 15-year loan can help you save in interest rate, although the monthly payment will be higher.
2. Will you be living in your home for long?
When you’re refinancing your home, the single most important thing is to know your break-even point. In other words, how long it will take to recover from the closing costs. If you’ll be selling your home within a few years, you may not benefit from a mortgage refinance.
3. What are the mortgage rates like?
The fact is that interest rates for mortgages fluctuate every day. If one day the rates have fallen enough that you think you can benefit from it, you need to make a quick decision. We recommend that the refinance rate is at least 0.5% lower than the interest rate you’re currently paying.
4. Can you improve your credit score or DTI?
Review your finances, especially your credit score and DTI ratio. Is there enough time and opportunity for you to improve them? If the answer is yes, then it’ll be worthwhile to do so. This can help improve your rates and likeliness for approval.
5. What are the closing costs like?
We won’t tire of reminding you that closing costs for a refinance can be high, which is why you need to consider them when refinancing a mortgage. It can start from 2% and up to 6% of the loan, which is a considerable amount.
So, is it time to refinance your home loan?
Just like looking for a mortgage loan when you were first buying your home, refinancing the loan can be a big decision as well. You need to invest more time and money to changer the loan terms and rates in a way that benefits you financially.
If you started in with a higher interest rate and the environment has since then decreased, it may be a good idea to refinance. So is the case if you’re looking to shorten the terms or cash out your home equity.
Of course, be ready to spend some time researching on how to refinance a mortgage and the best time to do so. Remember: services like Fund Depot are designed to make this process a much easier one!