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You’ve had the privilege of owning your dream home for some time and may be wondering if now is the right time to refinance your mortgage. Chances are, if interest rates have dropped since you first took out your original loan, refinancing has crossed your mind. However, lower interest rates aren’t the only indicator that it may be time to refinance.
In this helpful guide, we’ll explore the different scenarios surrounding refinancing. Is it the right time, or should you wait for better circumstances? Will refinancing save you money or cost you more over the life of the loan?
At Riverview Bank, we are here to assist you in every phase of homeownership. Our goal is to help you determine when to refinance your mortgage for maximum financial benefit. Keep reading to discover the optimal time for maximum savings.
When To Consider Refinancing
With every financial strategy, there are risks and rewards to consider. The same is true with refinancing your home mortgage. Homeowners must consider the potential benefits and drawbacks before deciding if refinancing is worth it.
Perhaps the greatest influence on determining whether you should refinance is timing. When is the optimal time to refinance a mortgage? When it will save you money and align with your financial goals. When should you consider waiting? When refinancing will cost you more and compromise financial goals.
Let’s identify some of the key times to refinance:
Mortgage Rates Are Lower Than Your Current Rate
Mortgage rates are a great way to determine when to refinance your mortgage for increased savings. If refinancing your home loan can secure better rates than when you first closed on your current mortgage, for instance, you may want to consider refinancing. Locking in a lower interest rate can secure lower monthly payments. In turn, lowering your monthly payments can free up your monthly income for other financial goals. Pay less on your mortgage each month, increase savings, and direct these savings toward other goals. Save money over the life of your loan, own your home outright sooner, and experience financial freedom.
Remember, refinancing a mortgage often includes closing costs and other loan fees. Refinancing may be a good idea if it reduces your rate by at least 0.5 to 1 percent, depending on the market. This can help you reach the break-even point faster and ultimately offset the cost of refinancing. Want to be sure? Use a mortgage calculator to see how much you could save.
If interest rate trends are on the rise, you may want to hold off. Or if refinancing your mortgage saves you less than 1 percent, the slight savings may not be enough justification for paying closing costs and other loan fees. Typically, closing costs include an origination fee and third-party fees such as a title, escrow, recording, appraisal, and so on.
Your Financial Situation Has Improved
Perhaps since your original loan you have paid down debt, increased your income, or in another way improved your credit score. If so, you may benefit from refinancing your mortgage for lower rates and more favorable terms.
Typically, the better your credit score, the better your rates and terms. Lenders use credit scores to weigh the financial reliability of their clients and whether they are at risk of defaulting on their loans. Good credit and debt-to-income (DTI) ratios indicate financial stability and a low risk of defaulting. Lenders reward low-risk lenders with more favorable rates and terms.
Aim to increase your credit score and lower your DTI before you refinance. Then secure a new mortgage with a lower rate and better terms. This enables homeowners to build equity and own their homes sooner.
New Loan Terms Can Increase Your Savings
Changing the term of your loan—that is, the repayment period—may save you money. If refinancing to a shorter or longer loan term will save you money, it may be the right time to refinance.
When you refinance, you are replacing your current mortgage with a new one. This means you can secure new loan terms that are more favorable to your current financial goals and lifestyle. Your life is not static, and your loan shouldn’t be either. If your circumstances have changed and your current mortgage no longer advances your goals or fits your lifestyle, it may be time to change the terms.
If you initially took out a loan with a 30-year term, you may benefit from shortening it. Longer terms tend to have lower monthly payments, which may have been ideal for your past circumstances. However, maybe your new goal is to pay off your loan faster. If so, you will want to refinance to a shorter term. This will increase your monthly payments but can significantly reduce the total interest paid over the life of your loan. Save more and own your home sooner.
Or perhaps you need to free up some money each month. If so, you can refinance to a longer term. Though this will cost you more in interest in the long run, it can help lower your monthly payments. Lower payments can free up cash for immediate financial goals, such as getting married, moving, or going back to school.
You Prefer a Different Type of Home Loan
If your home loan type is no longer the right fit, you can benefit from refinancing. Replace your existing mortgage with a new type of home loan.
For instance, if you originally qualified for an adjustable-rate mortgage and the rate is due to adjust upwards, you may want to refinance to a fixed-rate mortgage. Secure consistent payments with rates that won’t fluctuate.
If you started with a fixed-rate mortgage but now plan to move out in a few years, you might choose to refinance to an adjustable-rate mortgage with a lower interest rate. Adjustable-rate mortgages typically start with a lower fixed interest rate for the first few years, and if you sell your house before this initial period is up, you could save money on interest. Since you may also have to pay closing costs for the refinance, be sure to calculate your break-even point or talk to your lender before you proceed with this option.
You can Eliminate Private Mortgage Insurance (PMI)
If you originally purchased your home with less than 20 percent down, you are more than likely paying for private mortgage insurance. Fortunately, refinancing can remove PMI and reduce your monthly payments. If your home’s value has increased enough to lower your loan-to-value (LTV) ratio to 80 percent or less, refinancing could allow you to remove your PMI and save you hundreds of dollars.
The Bottom Line
Look at current market conditions (such as interest rate trends) as well as your financial health and goals. If rates are dropping and you have built enough equity in your home to secure a mortgage with better rates and more favorable terms, it may be time to take the leap.
When you’re ready, Riverview Bank is here to help. Apply for a refinance and achieve your financial goals sooner.