It is important to carefully consider when your mortgage should be refinanced. Refinancing your mortgage to get a smaller interest rate could result in significant monthly savings if you have a large home loan.
It is important to ask the following questions when deciding whether you should refinance or not your mortgage.
Are you looking to consolidate your debt?
Refinancing your highest-interest loans to repay debt can be a wise financial move if you are in serious debt. Credit cards, for instance, can charge as high as 20% interest which could force you to pay more every month in order to cover these interest fees.
You can borrow money less, which means you can save more money and pay off higher debts faster. The current mortgage rates are still very competitive so consolidate your debt.
What length of time do you intend to stay in your current residence?
If you are looking to refinance, you will have to pay closing cost. Refinancing your mortgage will bring you a lower monthly cost, but it will not guarantee that your home will be in your ownership for the required time.
This is also called the breakeven. You should not refinance your mortgage if you intend to sell your home before the breakeven point.
What amount can a lower interest rates save you?
Do not focus on the fact that interest rates are dropping. Instead, focus on how much you can save depending on rate changes.
A $400,000 mortgage can be saved a lot by a one percent interest rate drop. You could save $200 per month depending on the terms of your loan, taxes and insurance.
What is your equity in your home?
When refinancing your mortgage, always consider equity. You can get better rates if you have more equity. You can even avoid mortgage insurance. If you are looking for cash, home equity is even more important.
An example is a $100,000 mortgage with $50,000 equity. A new loan of $125,000 may be possible if you have a $100,000 mortgage. Your monthly payments could remain the same with a lower interest rate while you cash out an additional $25,000.
Mortgage refinancing benefits
Let’s look at the benefits of refinancing once you are satisfied with your answers to the questions.
Reduce your monthly payment
Refinances are a popular way for homeowners to reduce their monthly mortgage payments. If interest rates are lower now than they were when you first financed your home, this is a great option.
This is also helpful if your adjustable-rate mortgage (ARM), which will soon have higher interest rates, or private mortgage insurance that you can remove.
Create equity
If homeowners are able to afford a higher monthly payment than normal, they can increase their equity quicker.
This could enable you to change from a 30-year mortgage to one that is 15 years. You can then build equity faster and reduce financing fees. You can also save significant interest payments.
Programs for switching loans
You may find that the loan you took out is not right for you. There are many options. You might want to get lower rates.
Maybe your ARM’s fixed rate period is ending. There are many loan programs available that can be tailored to your needs.
Credit improvement
It can boost your credit score if you pay your monthly mortgage payments on-time. Your credit score will make it easier to refinance your mortgage at lower rates.
Depending on your financial situation, you might need to invest in one type or another of loan programs to increase your monthly payments and improve your credit score.
You may also be eligible for mortgage insurance. You can refinance to a program with lower monthly payments if your credit score improves.
Reduce your loan term
Many homeowners agree that it is an amazing feeling to be mortgage-free.
Although a transition from a 30-year loan to a 15 year loan can increase your monthly payments, it will save you significant interest over its life.