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Should I Refinance My Mortgage?
Refinancing your mortgage comes with plenty of perks — but only if it’s done at the right time and in the right situation. So how do you know when you should refinance your mortgage? Follow these tips and learn more about taking advantage of your home’s equity and boosting your financial health, too.
Signs You Should Refinance Your Mortgage
Refinancing a mortgage isn’t all positive — you’ll have to weigh the benefits against the costs. But if you do your research and are strict about managing your finances, you can make your mortgage refinancing stress-free, easy and beneficial for your family. Here are the situations when you should consider refinancing:
Mortgage rates have gone down since you got your current mortgage. Rates will differ from lender to lender, but there are plenty of ways you can check the average interest rate without getting an official quote from a bank. Go to lender websites or get in touch with a mortgage officer to get a gauge on current rates.
Most of the time, financial advisors would recommend that a homeowner get at least two-percent improvement on a refinanced mortgage in order for it to be worth. However, everyone’s financial circumstances are different — plus, borrowers should take closing costs and other fees into account when considering refinancing.
Your credit score has improved significantly. Generally speaking, the lower your credit score was when you got your mortgage, the more likely that mortgage carries a higher-than-average interest rate. If your credit score has improved, you may be able to get a better deal. If interest rates are higher than when you got your first mortgage, though, there may not be much of a benefit to refinancing.
Your income has gone up. If you and/or your spouse are making more money than you were when you got your mortgage, you could be in a much better financial situation. Not only could higher income get you a better interest rate, but you could use your extra cash to make a bigger down payment and shorten your term or lower your monthly payment.
Your home has gone up in value. If home values are on the rise, you could be eligible for a cash-out refinance — that means you take out a mortgage for more than you currently owe and receive the difference between that and your current mortgage in cash. If you then use those funds to renovate or improve your home, you can see your home’s value increase even more.
Cash-out refinancing isn’t an option for everyone. Most lenders will require that borrowers have at least an 80 percent loan-to-value (LTV) ratio to qualify. Calculate your home’s LTV ratio by dividing your current mortgage balance by your home’s value.
And if your home value has risen, cash-out refinancing isn’t your only option. You can still take advantage of lower interest rates, save money and get more equity in your home by refinancing.
You’re going to live in your current home for a while. If you plan on living in your home until the end of your mortgage or at least a few more years, you’ll be able to take advantage of the benefits refinancing offers. But if you plan on moving soon and you refinance, it could end up costing you more money. That’s because when you refinance, you’ll incur closing costs similar to those that came with your first mortgage — and if you sell before your savings on interest breaks even with those closing costs, you’ve lost money.
How Does Refinancing My Mortgage Save Me Money?
You know refinancing can get you a better interest rate on your mortgage, but how exactly does it save you money? It depends on your preferences and long-term financial strategy. Here are some ways you can take advantage of a refinanced mortgage:
Lower your monthly mortgage payments. If you want to keep the same term as your first mortgage, you can! But while you’ll be paying less per month, your savings in the long run will be lower than if you maintained the same monthly payment with your new lower interest rate.
Shorten your mortgage’s term. Keeping your monthly payments the same (or even paying more) will help you pay off your mortgage sooner, giving you more equity in your home and getting rid of your mortgage debt sooner. Talk to your accountant or financial advisor and your family about which option benefits you more.
Protect yourself from volatile interest rates. If mortgage rates are on the rise and your current loan is an adjustable-rate mortgage (ARM), you could find that your payments keep on going up because interest rates are increasing. If you refinance to a fixed-rate mortgage (FRM), you can lock in the amount you’re paying per month and avoid the higher interest rates.
Take advantage of falling interest rates. If mortgage rates seem to keep falling and you have an FRM, you could take a calculated risk and refinance your mortgage into an ARM. Keep in mind that interest rates can be unpredictable and switching to an ARM could lead to higher interest rates and monthly payments, too.
Speak to your family and, if possible, a financial advisor before deciding to refinance your mortgage. Once you’ve made the decision to refinance your mortgage, save money and/or take advantage of the equity in your home, talk to your American Family Insurance agent about protecting everything you’ve worked so hard for.