When Should You Refinance Your Mortgage?
If you’re considering refinancing your mortgage, you probably have many questions to ask financial experts. Along with interest rates, closing costs, and term lengths, there are several things to consider. Is refinancing your home a good idea? When is it beneficial to refinance? The truth is, the best time to refinance your home is when it makes financial sense to you. Continue reading this article to learn when you should refinance your mortgage.
When Is It Beneficial To Refinance a Mortgage?
Many circumstances make refinancing your home a good idea. In the broadest terms, refinancing your mortgage makes sense when it improves your current and long-term financial situation. Mortgage rates, home loan terms, monthly mortgage payments, and the cost of refinancing should all factor in when deciding if refinancing your home is a good idea or not.
So when should you refinance your mortgage?
Significant Drop in Mortgage Rates
Lower mortgage rates can translate into significantly reduced monthly payments and long-term savings. But just because rates go down doesn’t mean you should refinance your mortgage. Most experts agree that your new interest rate should be at least one to two percentage points lower than your current rate.
Calculating your break-even point is a great way to determine if refinancing your home is a good idea. A break-even point is when your monthly savings offset the cost of refinancing. For example, if refinancing costs you $4,500 and you save $75 per month in mortgage payments, your break-even point is 60 months. That means you have to stay in your home for at least five years before you break even on refinancing.
You Want To Shorten Your Loan Terms
Going from a 30-year mortgage to a 15-year one is a great way to save yourself money in total interest paid over the course of your loan. That’s because interest rates are typically much lower for shorter-term loans, and you pay interest over a much shorter period. The one drawback for many homeowners is that shortening your loan term typically raises your monthly payment.
You No Longer Want an Adjustable Rate Mortgage
As interest rates continue to rise, homeowners with adjustable rates are seeing their mortgage payments increase. Refinancing your home is a good idea if you’re concerned about rising rates or comfortable with the current fixed rates being offered.
Your Home’s Value Increased
Another instance when it would be good to refinance your mortgage is if your home’s value has gone up. Cash-out refinance options allow you to get a loan for more than what you previously owed and receive the difference in a cash payment. Many borrowers use this cash to pay off debts, make home improvements, pay for schooling, or invest in other real estate ventures.
Your Credit Score Has Improved
If you had a less than ideal credit score because of credit card debt when you purchased your home, your interest rates might be higher than necessary. It can be especially beneficial to refinance if your score has improved from the upper 600s to the mid 700s or higher. In that scenario, a new loan with a better rate can save you thousands of dollars throughout the life of your loan.
When Isn’t the Best Time To Refinance Your Home?
Just as there are times when you should refinance your mortgage, there are times it’s not in your best interest, including:
- Your mortgage is close to being paid off: If you’ve built considerable equity in your home and only have a few years left on your mortgage, refinancing can be like hitting the restart button. Typically the best time to refinance a home is early in your mortgage term.
- Your lender charges prepayment penalties: If your mortgage lender charges prepayment penalties, you may not save enough to justify refinancing your mortgage. You can always request your lender waive penalties fees, but there’s no guarantee that they will.
- You don’t plan to stay: If you plan to move soon or don’t think you want to stay where you are for more than a few years, you’re likely to lose money by not reaching your break-even point.
Still Unsure if You Should Refinance Your Mortgage? Summit Wealth Can Help
For nearly four decades, Summit has helped homeowners decide if it’s beneficial to refinance. Our team of financial experts offers free consultations to help you determine if now is the best time to refinance your home and choose loan terms and rates that fit your financial objectives. If you want to discuss whether or not refinancing your home is a good idea right now, reach out to Summit today.