You’ve probably had friends who recently refinanced their mortgages, and you might be thinking that this would be a smart move to make.
Refinancing can be a smart decision in many cases, but it’s always important to fully evaluate your situation before you go through with it.
If you’re wondering when to refinance mortgages, you’ll need to consider a few highly important factors. As you do this, you’ll know whether it’s a good idea for you or not.
Let me explain what those factors are so you can evaluate your situation and make a wise, informed decision about this.
Do You Have An Adjustable Interest Rate?
People with adjustable interest rates often look into refinancing around the time their rates will be changing.
An adjustable-rate mortgage (ARM) has a specific date in which the interest rate expires. Some ARMs expire in just three years after taking the mortgage, while others may not expire for five years or more.
An ARM doesn’t necessarily guarantee that your rate will change, but it gives the lender the option to change it. If interest rates are lower now than they were at the time you took the loan, you might want to keep the loan you have.
In this case, your rate would likely drop below the current rate. If interest rates are going up, though, refinancing to a different mortgage could offer a chance for a lower interest rate.
What’s Your Current Interest Fixed Rate?
Interest rates, in general, on mortgages greatly affect whether or not refinancing is a good option. When you can reduce your interest rate on your loan through refinancing, you will:
- Have a lower mortgage payment each month
- Save money on interest for the duration of the loan
Therefore, it’s a good idea to take a look at your current rate. If refinancing allows you to lower the rate, there’s a good chance it might be the right move at this time.
If refinancing leads to a higher interest rate, refinancing is probably not a good move at this time.
Are You Paying Private Mortgage Insurance?
It can also be a good idea to refinance if you are currently paying private mortgage insurance (PMI) right now but could eliminate this insurance by refinancing.
PMI is something that should drop off your mortgage when you pay enough on your loan to owe less than 80% of the value of the home.
Refinancing often gives you a way to eliminate this requirement sooner, though. When you refinance, you will need to get an appraisal of your house, and chances are, your home is worth more today than it was when you bought it.
When you refinance, the lender will look at the current appraisal amount to see the percentage of equity you have in the house. If you have more than 20% equity in the home, you would no longer have to pay PMI.
The amount you pay for PMI is between 0.5% to 1% of the loan amount. If you can eliminate this payment by refinancing, you could potentially save a lot of money.
Do You Want to Shorten Your Mortgage?
Are you earning more money now than you did when you originally took out the loan? Are you in a better overall financial position?
If so, refinancing could be a great tool to use to shorten your mortgage.
Suppose you took a 30-year loan ten years ago. Now, ten years later, you would still have 20 years of mortgage payments left to make. If you refinanced your loan, you could reduce it to a 15-year loan.
By doing this, you’d cut off five years from your loan. Your payments may go up a little bit, though, so it’s important to make sure you can afford the new payments you’d have before going through with the refinance.
Is There Another Reason You’re Considering When to Refinance Mortgages?
If you have a reason to need a large amount of cash, and if you have equity in your home, borrowing from your equity through a home refinance offers the perfect solution.
A lot of people refinance for this purpose, and they may use the money to finance a home remodeling project or to consolidate debt. There are plenty of good reasons to choose a cash-out refinance.
What’s Your Break-Even Point?
As you’re reading these factors, you might find that several of them are pointing you in the direction of refinancing. If so, there’s one last thing to consider – your break-even point.
Anytime you refinance, you are taking a new loan, and a new loan will have closing costs and fees. You can pay them with cash when you refinance, or you can roll them into your loan. In either case, they are direct expenses involved with this process.
So, before you refinance, find out your break-even point. You can do this by dividing the total cost of the fees by the amount of money you’d save per month by refinancing.
The answer to this will tell you how many months it will take to recoup the expenses of refinancing. If you plan on staying in the house for at least that long, refinancing is probably a good idea.
Learn More About Refinancing
When to refinance mortgages is a great question to evaluate as you prepare to consider this as an option.
You might find that this seems to be an ideal solution for your situation. If so, you should start researching your options.
You can learn more about refinancing your mortgage by contacting us. We’d love to help you learn more about your options and the benefits refinancing would offer you. Call us today or fill out this form to get started.