When To Refinance Your Mortgage For a Lower Rate
Mortgage refinancing is a common thing among homeowners. That’s because of the incredible benefits that come with it, including a lower interest rate, a lower monthly payment, a shorter payoff term, and the ability to cash out your equity for other uses. So if you feel that your current interest rate on your mortgage is quite high, the best you can do is to refinance the mortgage.
The best time to refinance doesn’t have any hard-and-fast guidelines. It actually relies on your financial situation, home ownership intentions, and refinancing objectives. Do you want to reduce your rate or your payment? Would you like to pay off your loan more quickly? You might be able to achieve both with a mortgage refinance from private lenders.
Here are some tips for when it might be wise to refinance:
A 1% Or Greater Interest Rate Reduction Is Possible
Most experts agree that if you can reduce your rate by at least one percentage point, refinancing is a perfect option. A half-point may be advantageous in some circumstances, notably for bigger loan sums (when even a fraction of a percentage can make a big difference in long-term costs).
You Intend To Reside In The Property Long Enough To Benefit From It
Calculate your break even point, or the month when you’ll recoup your closing costs, to decide whether refinancing is worthwhile. Your breakeven threshold would be 33 months if, for instance, your refinance costs $5,000 and saves you $150 per month (5,000/150). Refinancing is likely to be financially advantageous if you intend to stay in the home for at least 33 more months.
You Need Cash
Consider a cash-out refinance instead of using your credit card for foreseeable costs if you have them. This technique can typically save you money in the long run because mortgage loans, including refinances, typically have interest rates that are significantly lower than those on credit cards and other financial products. Many homeowners also consolidate their credit cards and other obligations through cash-out refinances, basically combining them into a single loan payment.
Things To Take Into Account Before Refinancing
There are a few considerations you should make before thinking about refinancing.
- You will first need to cover closing charges. These are estimated to cost roughly $5,000 per loan, but the precise fee may vary depending on your lender, loan size, and location. Alternatively, you can include these expenses in your alternative mortgage and pay them off over time. Just keep in mind that doing this will result in a larger loan balance, monthly payment, and long-term interest rates.
- Your credit score may suffer if you refinance, at least momentarily. This is because when processing your application, your lender will run a rigorous credit investigation. Your score temporarily drops as a result (typically no more than five points). But if you pay your bills on time, the rating should increase quite soon. But fortunately, you can refinance a mortgage with bad credit.
There are many reasons to refinance your mortgage, from cutting monthly expenses to getting out of an adjustable rate loan with a rate that may rise. There are many options to consider, such as term length, interest rate, and whether to lock in a fixed or variable rate. You can also consider refinancing to lower your monthly payment or to access different products, such as a reverse mortgage. Refinancing doesn’t happen overnight, but is worth the effort when you can lower your payments and get out from under the strain of debt.