When you have a home loan at a fixed-rate, you will have the same mortgage payment until the end of the loan, unless you find a better rate and refinance. Refinancing can help you obtain a lower rate for the rest of your loan term and save money, but you should know what refinance actually means and what you should take into account before you decide to go through the process. Generally, it’s easier to refinance instead of purchasing a new home, particularly when you’ve lived in your home for a while and have equity. But, you will face paperwork and closing costs, so you need to look at how much a refinance will cost and see whether or not it will still save you money.
When Is The Right Time To Refinance Your Home?
Refinancing a mortgage means paying off a current loan and getting a new one. Homeowners usually refinance:
- To get a lower interest rate, or
- To reduce the term of their mortgage, or
- To convert from an adjustable-rate mortgage (ARM)
- To a fixed-rate mortgage, or
- To tap a home’s equity in order to finance a large purchase or to consolidate debt
But there are some benefits and pitfalls. One pitfall of refinancing can be additional costs. The refinanced mortgage needs appraisal, title search and application fees. Therefore, it’s imperative for a homeowner to decide whether refinancing offers a tangible benefit.
Secure a Lower Interest Rate
One big reason to refinance is to shorten the interest rate on your existing loan. Shortening your interest rate will help you save money and improve the rate at which you build equity in your home while reducing the size of your monthly payment.
Shortening the Loan’s Term
When interest rates fall, homeowners look to refinance an existing loan for another loan that, with no change in the monthly payment, has a shorter term.
Before you look to refinance, here are few things to consider:
1) Credit score
Your credit report will be analyzed, so ensure your score is good enough to qualify for the lowest rates and there’s nothing left for a lender to show as an issue.
2) Debt, income and payments
The lender will see your income and expenses to ensure you can afford your new loan. You should be certain that you have never been late on payments as that will lessen your chances of qualifying.
3) Your home value
There are many online sites that help you find how much your home may be worth. Research interest rates and then consider a refinance calculator to see if refinancing makes financial sense.
4) The Bottom Line
Refinancing can be an excellent option if it shortens your mortgage payment along with the term of your loan while helping you build equity more quickly.
If utilized carefully, it can help in getting debt under control. Before you refinance, take a close look at your financial situation and ask questions such as “How long do I plan to continue living in this house?” or “How much money will I save by refinancing?” Remember that refinancing will cost you some amount of the loan’s principal in fees and/or closing costs. It could take years for you to cover your costs with the savings garnered by a reduced interest rate or a reduced term. Therefore, if you don’t want to stay in the home for too long, the cost of refinancing may wash out any of the potential savings.
