After you’ve purchased a home, a lot can change in life, and your loan may no longer work for your situation. You might consider a mortgage refinance for any number of reasons. Perhaps you’d like to consolidate your debt, remodel your home or use your home’s equity to pay for a large expense. It may be that you’d simply like to lower your monthly payments. Whatever your situation is, it’s crucial to assess what you need from your refinance and whether it’s the right time to begin the process.
Mortgage refinancing can save you money, but it can also cost you money in the long run. Since refinancing means you typically need cash for an appraisal, title search and other fees, it's important to know what, exactly, refinancing might mean for you. So, when is a good time to refinance your home? At Solarity Credit Union, we have expert Home Loan Guides who can walk you through your options and determine how much you may save with a refinance. We have four key considerations when deciding if it’s a good time to refinance your home.
1. Are interest rates lower?
The number-one reason to consider a refinance has to do with federal interest rates. The Federal Reserve sets interest rates for the country. When economic growth is slow, the Fed lowers interest rates to make credit more readily available to consumers—that money then flows back into the economy.
When you refinance your mortgage at a lower interest rate than your initial loan, you can save money on your monthly payments and reduce the amount of time you’ll have to pay on your loan. A good rule of thumb is that a reduction of 1% or more on the federal interest rate is worth the effort of refinancing. There are mortgage calculators online that allow you to see what your monthly payment would look like at the current interest rates.
During times of slow economic growth, a lower interest rate can be a huge incentive to refinance your home. Even if you choose to stay with the same monthly payment, a lower interest rate can allow you to build equity in your home more quickly since you’ll pay off a larger portion of your mortgage at a faster rate.
2. Are you paying mortgage insurance?
As property values have risen in Washington and beyond, fewer people have the ability to make the standard 20% down payment on their initial home purchase. Private mortgage insurance (PMI) allows borrowers to buy a home with a lower down payment, but it adds money to their monthly mortgage payment. If home prices in your area have risen since you purchased your home, you likely have increased equity in your home. If your property value has risen and you own at least 20% of the home’s value, refinancing can help you reduce or eliminate your PMI payments.
3. Do you have high-interest debt?
If you have high-interest debt, such as credit card debt, it could make sense to refinance your home and consolidate that debt at a lower rate. It’s important to note that when you refinance to pay off debt, you’re cashing in on your home’s equity. Your mortgage payment will increase depending on how much equity you decide to use. You will also likely extend the life of your loan, which will cost you more over time.
The exact nature and amount of your high-interest debt are important to consider before taking advantage of a cash-out refinance. While it is prudent to consolidate loans and credit card debt at a lower rate, you also need to consider your spending habits. If you’ve already over-extended yourself, it’s vital to have a plan in place to reduce overall spending. If you extend the amount of credit you have through a cash-out refinance and then spend that money at the same overall pace, you’re instantly increasing your losses by increasing your monthly payment, losing equity in your home and extending the length of your loan, all while paying refinancing fees to do so. If, however, you have a solid plan in place to reduce spending and debt, consolidation may be an effective tool for you.
4. Do you want to change the terms of your loan?
Loan products come in different shapes and sizes, depending on the needs of the borrower at the time of purchase. First-time homeowners who don’t plan to stay in a home for too long, for example, sometimes choose an adjustable-rate mortgage (ARM) because interest rates for those loans are initially lower than a fixed rate. However, the rate fluctuates and usually increases over time. Consequently, you may end up paying a higher interest rate later in the life of your loan. Refinancing during a time of low federal interest rates could help you move to a fixed-rate mortgage, eliminating concern over future rate hikes.
Alternatively, if you agreed to a fixed-rate mortgage when you purchased your home, you locked in the interest rate you were given at the time for the life of your loan. If you plan to move within the next several years and federal interest rates are on the decline, it may make sense to change the terms of your loan. If rates continue to fall, you won’t need to refinance each time the rate drops, and you’ll likely end up with a lower monthly payment. Since you intend to move at some point before you pay off your mortgage, you also won’t need to worry about whether interest rates rise 20 or 30 years from now.
Lastly, you can refinance to shorten the life of your loan. When interest rates fall, homeowners can sometimes refinance for a shorter-term loan that has very little impact on their current monthly payment. You can talk with an expert Solarity Home Loan Guide about your specific financial situation with no obligation to apply. They’ll help you determine if this is the right and best move for you.
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