When is the Right Time to Refinance Your Mortgage?
Are you thinking about refinancing your mortgage? While mortgage refinances are popular and financially savvy decisions for some homeowners, it doesn’t necessarily mean it’s the right thing for you. Every person and every home is different, so be sure you understand how to refinance and speak with an independent mortgage broker before starting the process.
Let’s take a look at some of the best and worst times to refinance so you can make an educated decision on whether or not it’s right for you.
When Should You Refinance?
Thinking about refinancing your home loan? Here are a a few examples of when you should refinance:
1. When Interest Rates are Low
This is the most obvious reason. When the mortgage interest rates are at least 0.5% - 0.75% lower than your current home loan, it’s time to start looking at a refinance. A lower interest rate can translate into significant monthly savings.
In addition, this could be a good chance to switch from a variable-rate to a fixed-rate or even drop from a 30-year mortgage to a 15-year mortgage. In this case, your monthly rates may be higher, but you’ll be saving more money on interest over time.
2. When You Need to Consolidate Debt or Remodel Your Home
Are you looking to remodel your home? Or, maybe you just find yourself in need of some extra cash. Take a look at where your equity stands on your home. If you have equity built up, a cash-out refinance may be the best option for you to help pay for home updates or even consolidate debt.
3. When You Have Enough Equity to Remove PMI
Lenders will require you to pay Private Mortgage Insurance (PMI) if you put less than 20% down on your loan. If you have enough equity built up, you can do a cash-out refinance and use those funds to put down 20% of your new loan, therefore allowing the PMI to be removed and dropping your monthly payment.
When Should You NOT Refinance?
Here are a few reasons why you shouldn't refinance your home loan:
1. If You Plan on Moving or Selling Your Home in the Next Two Years
If you’re not sold on your current location and have been thinking about moving, you should probably stay away from refinancing your mortgage to avoid the closing cost fees. Refinance fees can add up to be roughly 2-5% of the principal balance of your loan. If you move within the first two to three years after refinancing, you’ll likely end up losing more money instead of saving it.
To confirm when you’ll reach that breakeven point, you can find the number by dividing your closing costs by your monthly savings.
2. If You Have a Poor Credit Score
If your credit score isn’t exactly where you’d like it to be, you might want to hold off on refinancing. Your credit score has the power to impact your interest rate and could end up hurting you in the long run with a higher monthly payment or longer loan terms. If you have questions about your credit and how to know if you have a suitable score for a refinance, consider talking to an independent mortgage broker who can help you figure out what home loans are available for your specific financial situation.
3. If You Can’t Afford the Closing Costs
When you refinance your mortgage, you’ll need to pay upfront closing costs that can’t be rolled into the loan. If you don’t have the financial flexibility to pay these fees right away, now might not be the best time for you to refinance. Closing costs can vary, so an independent mortgage broker can also work with you to see what your options look like.
If you’re ready to refinance your current home loan, it’s crucial to work with an independent mortgage broker to understand your options. They will work with you every step of the way — from application to closing — to ensure the process goes smoothly.
Ready for a simple, painless refinance experience? Find your local mortgage broker today to get the process started.