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So how can you tell if it’s the right time for you to refinance your mortgage? Make sure you get the facts. Consider your current mortgage before you refinance:
You may have an original loan term of 15, 20, or 30 years, for example. The most common length of time for a mortgage loan is 30 years.
Loan term remaining:
If you continue making scheduled payments on your current loan, when will it be paid off? Do you want to pay off your loan faster? Or would you like more time to pay off your loan with lower payments?
Current interest rate:
Your latest statement from your lender should tell you the rate you’re paying now. If your interest rate is 0.75% or higher than today’s lowest rates, you may want to refinance. Even an interest rate difference of one-half of 1% can make a significant difference in your total interest expense, assuming you intend to stay in your home for more than a few years.
Fixed or variable interest rate:
If you have a low rate, but it’s on a variable-rate mortgage, you could face much higher interest expense and monthly mortgage payments when rates rise. Fixed and variable rate mortgages have very similar rates now. They probably won’t go much lower, and they’re likely to rise from their current lows. This could be an opportunity to lock in a low, fixed-rate for the duration of your mortgage.
A new, refinanced mortgage may help you if you’ve had any of these changes in your life:
Interest rate changes:
As interest rates have continued to edge lower, some homeowners have even refinanced twice in the last 12months. The most compelling reason for refinancing your mortgage may be the opportunity to get a lower interest rate—and save a significant amount of interest expense over the life of your loan.
Career and income changes:
Your financing needs to change with your income level and job security. For example, if your income and credit history have improved since you purchased your home, you may qualify for a more favorable loan now. With increased income, you might choose to refinance with a shorter term loan, such as a 15-year loan. On the other hand, if you’re facing financial stress, you may want to refinance with a longer term loan to minimize your monthly payments.
Marriage, divorce, or other major family changes can affect how much you can afford to pay in mortgage payments. For example, if your partner has passed away, you may be having difficulty making your current payments. A longer term loan, perhaps at a lower interest rate, can make staying in your home more affordable.
You may want to refinance because of other financial changes. For example, if you receive an inheritance or other windfall, you could pay down your mortgage.
You can generally make extra payments on your mortgage principal without getting a new mortgage. However, making extra payments does not reduce your monthly payments. If you’re paying off a significant percentage of your mortgage, you may want to take out a new mortgage. With a lower principal amount and potentially a lower interest rate, your new monthly payment may be considerably lower.
Other financial changes, such as deciding you want to retire early and you want your mortgage paid off before you retire, may also mean your mortgage needs have changed.
Time to get rid of PMI:
If you purchased a home with less than 20% down, you may be still paying for private mortgage insurance (PMI). You may be able to get rid of PMI without refinancing. However, refinancing to get rid of PMI isn’t a bad idea, especially if you get a lower interest rate at the same time. You are most likely to be able to get a new loan with no PMI if your home has gone up in value, you’ve been paying down the balance, or both.
Need to utilize home equity:
The difference between the value of your home and your mortgage balance is called your home equity. By taking out a larger new mortgage than your current mortgage, you can take equity from your home and put money in your pocket for other purposes.
Refinancing to take out home equity got a bad name when homeowners repeatedly refinanced their homes before the recession about a decade ago, finding themselves underwater when real estate prices fell. That doesn’t mean utilizing home equity is always a bad decision. Taking equity from your home to make a purchase or pay off higher interest debt can be part of a wise, long-term financial plan, especially when the interest rate on your new mortgage is significantly lower than other sources of financing.
Refinancing a home often sounds like a good idea, but it’s important to remember that getting a new mortgage costs time and money. You typically pay a loan origination fee, plus closing costs and appraisal fees. You can also pay for discount points to lower your interest rate even more.
As a general rule, you shouldn’t refinance your home if you expect to sell it within the next couple of years. Even if you lower your monthly payments, you won’t recoup the costs of refinancing.
The longer you intend to stay in your home, the more important it is to make sure you have a mortgage with the right terms for your situation and at the most desirable interest rate. Taking the time to apply for mortgage refinancing now can save you a significant amount in mortgage interest, help you pay your mortgage off faster, or help you work toward your other financial goals.