There’s a good and bad time to refinance your home. It’s not always just about the lower rate. There’s a lot more that goes into the decision of refinancing. Keep reading to learn the top three times it makes sense to refinance your mortgage.
You Can Lower Your Interest Rate
Okay, lowering your interest rate can definitely help, but only if it makes sense to do so. If you can lower your rate at least 1 percentage point, you probably stand to save a significant amount of money each month. But, don’t just focus on the interest rate. You must also consider the closing costs.
What you’ll need is your break-even point. This is the point that you’ll start realizing the savings of refinancing after you pay off the closing costs.
Here’s an example:
You can save $100 per month on your mortgage payment by refinancing. The closing costs will run you $4,000. Your break-even point is:
$4,000/$100 = 40 months
If you know you’ll still be living in the home in 40 months and for a while after that, it pays to refinance. You’ll realize the savings and pay less interest over the life of the loan.
You Can Lower the Term
One of the hardest parts of refinancing is resetting the term. Let’s say, for example, you had a 30-year term initially. You already paid on that loan for five years. Now you want to refinance because you can lower your rate and save money.
If you take another 30-year term, you start right back at square one. However, if you can lower the term, you stand to save. Even if your payment is slightly higher, you will save in the end. This is because you’ll pay interest for a much shorter time.
Let’s say rather than a 30-year term, you were able to afford a 15-year term. You just cut the time you would pay interest in half. If you can’t afford the 15-year, but can afford a 20 or 25-year, you still stand to save a significant amount of money on the loan.
You Can Get Out of an ARM
You might have taken an adjustable rate mortgage because it was more affordable at the time you bought your home. Maybe it allowed you to afford a higher loan amount. But now that it is adjusting, you no longer want it.
Again, refinancing might leave you with a slightly higher rate and/or payment, but it will be worth it in the end. An ARM is risky. You never know what your rate will be, so it could leave you unable to make your mortgage payment. If you can secure the fixed rate, you lower the risk and possibly lower the amount of interest you pay in the long run.
Your Credit Score Increased
It might seem odd to refinance just because your credit score increased, but if you went from a ‘bad’ credit score to a good one, you are in a good position.
For example, let’s say you had a 600 credit score before and had to get a subprime loan. Now you have a 750 and have a great credit history. You may qualify for a conventional loan now, which could give you a lower interest rate and better terms.
Again, you’ll have to determine your break-even point to make sure it makes sense. Will you be in the home long enough to enjoy the savings? If you plan to move in a couple of years it probably wouldn’t’ make sense. But, if you know you’ll be there for another 10 years or so, the interest savings could be well worth it.
Refinancing is a personal decision and it’s also one you need to make at the right time. Rates increase and decrease often. You’ll need to figure out which rate will suit you the best and give you the greatest savings. Sometimes it’s not about the lower interest rate, but rather the more predictable fixed rate or a shorter term. Figure out what you need and wait until those circumstances happen.
It doesn’t make sense to refinance if you won’t see a benefit, though. Refinancing costs money every time you do it. Even if you take a no-closing cost loan, you pay the costs in the slightly higher interest rate.