With interest rates remaining higher than they were just a year ago, you may be wondering if it’s a good time to refinance. Good question.
The purpose of a refinance it is the replacement of an existing mortgage loan with a new one. A lot benefits of refinancing and that includes more than just lowering your interest rate. It’s also helpful for homeowners who want to ditch them private mortgage insurance (PMI)change the term of the loan or other factors.
Refinancing is not beneficial for everyone. It depends on your specific financial situation. If you think you could benefit from refinancing your mortgage, start by answering a few simple questions see how much you could potentially save.
Here’s what you need to know to properly plan your mortgage refinance.
When is the best time to refinance a mortgage?
There is no set rule when you must refinance. It depends on your budget, homeowner plans and goals. Want to lower your rate or payment? Do you want to pay off the loan faster? A mortgage refinance can allow you to do both.
Here are some tips on when refinancing might make sense:
- You can reduce your interest rate by 1% or more: Check Weekly Freddie Mac rate updates and compare those rates with your own. Most experts say refinancing is worth it if you can lower your rate by at least one percent. In some cases, half a point can be useful — especially for larger loan amounts (where even a fraction of a percentage point can make a big difference to long-term costs).
- You plan to be in the home long enough to receive the following benefits: To determine if refinancing is worth itcalculate your break-even point—or the month you’ll pay yours back closing costs. If your refinance costs, say, $5,000 and you save $150 a month, the break-even point will be around 33 months (5,000/150). If you plan to be in the home for at least another 33 months, then refinancing is probably worth the money.
- You need cash, and you’ll likely have to put the costs on a high APR credit card without it: If you have upcoming expenses that would otherwise go on a credit card, you may want to consider a cash refinancing instead. Interest rates on mortgages (including refinancing) are much lower than on credit cards and other financial products, so this strategy can save you long-term interest. Many homeowners also use cash-out refinancing to consolidate their credit card and other debts — essentially rolling them all into one loan payment.
By answering a few simple questions, you can determine if a mortgage refinance makes sense for you. Or use the table below to calculate the numbers.
If you decide to refinance, consider doing it before the end of the month. This will lower your closing costs as you will only have to pay a couple of days of interest up front. You may also want to consider refinancing at the end of the quarter, when mortgage lenders may be looking to meet the quota (and potentially offer better deals to do so).
When should you avoid refinancing a mortgage loan?
While a mortgage refinance sounds good in theory, you need to make sure you’re a good candidate for one. In this case, timing and the current state of your personal finances are key.
Here are some guidelines for when refinancing might not be the best idea:
- You just bought a house: It’s usually not wise to refinance right after buying a home. That’s because you’re paying closing costs twice (which increases your break-even point) and because some lenders charge a prepayment fee. It essentially penalizes you for paying off your mortgage too early.
- You cannot secure a lower interest rate: Refinancing may also not be recommended if you are trading a low interest rate for a much higher one. While there are some scenarios where it might make sense, raising your interest rate will only add to your monthly expenses and increase your interest payments in the long run.
- You have a low credit score: You probably won’t want to refinance if you have poor credit. Low scores usually equal higher interest rates, which can reduce the savings a refinance can offer you. Generally speaking, mortgage lenders reserve the best interest rates for borrowers with scores above 740. However, there are ways improve your account.
If you’re not sure what rate you’re eligible for, use the online tool to find out now.
3 things to consider before refinancing
Before considering refinancing, it’s important to keep a few things in mind.
- Closing costs: You will have to pay closing costs. Freddie Mac estimates these to be around $5,000 per loan, but the exact amount will depend on your lender, loan amount and location. You can also roll these costs into your loan and pay them off over time, just be aware that this will mean a higher loan amount, monthly payment and long-term interest costs.
- Credit rating: Refinancing can also hurt your credit score – at least temporarily. This is because your lender will make a serious credit inquiry when processing your application. This causes a temporary decrease (usually a maximum of five points) in your score. However, as long as you make your payments on time, the score should recover fairly quickly.
- Reverse mortgage: If a traditional mortgage refinance or cash-out refinance doesn’t sound like something that might work for you, reverse mortgage should also be considered. A reverse mortgage allows homeowners (62 and older) who have paid off all or most of their mortgage to get some of the equity in their home. The released equity, which is considered tax-free income, can help pay off debt, bills or complete home renovations. However, it must be repaid if the homeowner dies or decides to sell the home. Make sure you know pros and cons of this alternative before continuing. If you think you would benefit from a reverse mortgage, you can take the first step today by seeing what you qualify for.
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