About 17% of homeowners refinanced their mortgages during the pandemic. Half of all homeowners aren’t thinking about it and 23% say it’s too much to do.
If you’re among those who are thinking, “When should I refinance my mortgage,” you know that it could save you money. Even if you haven’t considered refinancing your mortgage, you should take a look at it.
Interest rates are at record low levels and they won’t stay there forever. The opportunity to save is incredible and it won’t last long.
If you want to know more about refinancing, you’re in the right place. Keep reading to find out what refinancing is and when the right time is to refinance your home.
What Is Refinancing?
When you purchased your home, you probably took out a mortgage to finance the purchase. The loan terms are probably for 30 years.
You have a monthly mortgage payment. Your loan may have a fixed interest rate or an adjustable interest rate. Your interest rate was determined by your credit at the time and interest rate levels.
When you replace your original loan agreement with another loan for a property, this is called refinancing–or remortgaging in the UK. The new loan pays off the old one, and you pay according to the terms of the new agreement.
Here’s how it works. If you bought your home in 2008, the average interest rate was 6.03%. By comparison, the average interest rates in 2021 have been hovering around 3%.
You took out a $200,000 loan at 6.03% and pay $1200 a month. Over time, you paid down the mortgage and now have equity in the home.
There’s $100,000 left on the balance of the mortgage. Refinance with a 30-year mortgage at a 3% interest rate, your payments drop to $422 a month. Even with a 15-year mortgage, your payments are $691.
The refinancing benefits are the reduced interest rate and lower monthly payments. In this example, you just added about $500 to your home budget.
This is ideal if you need additional cash to make up for price increases.
Potential Pitfalls of Refinancing
Refinancing isn’t for everyone. There are some potential issues to be aware of before you look into refinancing options.
The first thing to be aware of is closing costs. Remember when you bought your home, you had additional costs to pay the lender’s fees?
You’ll have to go through the same thing with refinancing. Expect to pay up to 5% of the loan in closing costs.
Refinancing impacts your credit score. Your lender will do a hard credit check to make sure you’re able to pay off the new loan.
Consider the long-term consequences of having the loan. If you get a short-term loan, your payments may increase. Think about how long it would take to see a return on the loan refinance.
When Should I Refinance My Mortgage?
Refinancing can be a good thing or a bad thing. It all depends on your financial situation.
Are you still asking, “When should I refinance my mortgage?” Let’s look at some refinancing options to help you decide if refinancing is right for you.
Do you have other debt, such as credit card and student loan debt? If you have enough equity in your home, you might be able to refinance your mortgage and use the equity to pay off other debts.
This article shows you how it can help and if you should pursue this option. If you do use refinancing to pay off debts, make sure you have a plan in place to stay out of debt.
Most homeowners refinance because they want a lower interest rate. These homeowners get a lower interest rate, but it takes several years to break even on the refinance.
For homeowners planning on selling their homes soon, refinancing doesn’t make sense. You’ll pay thousands in closing costs only to turn around and sell the home.
Refinancing is a financial tool that can help you improve your financial situation. Carefully consider all possibilities before you decide that this is a good option for you.
How to Refinance a Mortgage
Before you shop for lending options, be sure to understand why you’re refinancing. That helps you analyze the different loans so you get the one that achieves your goals.
You don’t have to use the same lender to refinance your loan. This is one of the big refinancing benefits if you don’t like your current lending company.
Check your credit score to make sure it’s in good standing. If it’s not, you’ll need to clean up your credit before you apply.
Contact several mortgage companies and get pre-qualified to see what the initial loan terms are. You can apply for refinance loans with multiple companies, but do so within a few days of each other.
Compare the terms of each loan and select the one that meets your needs. Close on the loan and reap the refinancing benefits.
Take Advantage of Low Interest Rates While You Can
“When should I refinance my mortgage?”
Don’t forget to take into account your lifestyle and financial situation. You might be able to pay off old debts and improve your financial health.
Did you learn a lot about the refinancing options and benefits? You’ll learn a lot more by clicking on the Finance tab at the top of this screen. Check out the other articles to improve your finances today!