When to Refinance Your Mortgage
You don’t have to settle for the mortgage you have. Refinancing offers you the opportunity to find the mortgage you want. If you’re unfamiliar with the process of refinancing, it can be difficult to know when the time is right. Understanding the benefits of refinancing can help you know when the conditions are ideal for securing a new mortgage with more favorable terms.
What is home refinancing?
Refinancing is the practice of replacing an existing loan with a new one, often with a different lender. The goal is to secure better terms with your new loan, whether that means a lower interest rate or an extension on the term of your loan. When you refinance, the new loan will pay off the remaining debt from your previous loan, but you will still owe the same amount. If you have a lower interest rate on your refinance loan, you will save money by paying less interest on the remaining loan balance. Some borrowers may simply want to extend the period over which they’ll pay back the balance of their loan, making monthly payments more manageable but with the trade-off that they’ll likely pay more back in interest over the course of their loan term.
When is the right time to refinance your home?
You can’t simply sign for a mortgage and then turn around and immediately start shopping for a better home loan rate. Before a lender agrees to refinance your mortgage, they are first going to want proof that you have maintained your original mortgage for a minimum of 12 months. Lenders will also check to make sure you have a stable source of income, review your debt-to-income ratio and ask for your credit score.
Lower credit scores tend to lead to higher interest rates. So one reason to refinance your mortgage is if you have grown your credit score since signing for your first mortgage. The U.S. Federal Reserve can also lower interest rates to encourage more consumers to borrow and spend money from lenders, helping to stimulate the economy. Pay close attention to news related to the federal interest rate because that can help you know when to refinance.
Is refinancing right for you?
Home refinancing is an especially appealing option if you have an adjustable rate mortgage. With an adjustable rate mortgage, you start with a fixed interest rate for a period of time before your rate starts to fluctuate with the market. Rather than allow the market to dictate your interest rate, you can refinance into a fixed-rate mortgage at current rates.
While there are borrowers who prefer a 30-year term for their mortgage, there are those who see refinancing as an opportunity to secure a shorter term. Their goal is to own their home as soon as possible, but a shorter term generally comes at the cost of higher monthly payments. The rule of thumb is to avoid mortgage payments that exceed 25% of your take-home pay.
Consider mortgage closing costs
If you are considering refinancing, it is also important to consider the closing costs, which can include a home inspection fee, lender’s attorney review fee, origination fee and points fees. There may also be a prepayment penalty on your existing mortgage. Be sure you consider the total cost of refinancing and that you can afford all of the potential fees.
If you are interested in refinancing your mortgage, please contact us.