Refinancing your mortgage is a sensible solution for numerous reasons including reducing your interest rate, taking cash after cash-out refinancing, converting from adjustable to fixed-rate mortgage and many more. For numerous borrowers, it is a perfect time to refinance because the market rates have fallen compared with the previous quarter.
Therefore, if you wish to refinance, the main idea is to calculate your break-even point so you can understand how long you will get the benefits you wanted in the first place. Most people choose to do it with an idea to reduce monthly installment, pay of loan faster or tap the equity for additional cash they can use for numerous purposes.
At the same time, refinancing an old loan and replacing it with a new one can be a sensible thing especially if your credit score increased, meaning you can land lower interest rates, which will directly help you save thousands of dollars. By clicking here, you will learn more about refinancing.
If you are still deciding on whether you should refinance or not, we recommend you to consider the current mortgage rates on the market. Of course, the math is not as simple as it seems, because the one you see may not apply to you. However, it is a perfect way to compare the moment when you first took your loan and current trend, which may change.
We can differentiate a few refinance options available on the market that feature specific advantages and disadvantages. The main idea is to review each option before making up your mind. Still, you should consider relevant factors that will help you with the process including:
- The cost of getting a new loan
- The amount of time you plan to reside in a home you wish to refinance
- The after-tax monthly saving based on the new installment and interest rate.
After learning about these factors, you can calculate the return and see whether you will save money eventually or not.
Reasons to Refinance Your Mortgage
Generally, numerous borrowers decide to refinance with an idea to reduce the expenses altogether, which can happen in different ways. For instance, a single percent interest drop can help you save thousands of dollars throughout the loan’s life. At the same time, you should plan other expenses that come with the new mortgage including closing costs.
Reduce Interest Rate
For instance, if the rates have dropped since the moment, you first took your mortgage, and you wish to go even further since your credit score increased significantly, you can take advantage of rate-and-term refinance, which is the most common reason people decide to do it in the first place.
The best course of action is to ensure the new interest rate is one-half or three-quarters lower than the previous one, which will provide you with the biggest savings. If your credit score has improved since the last time you applied, you can qualify for better interest rates than the one you currently have.
You will get the best mortgage refinancing rates by having at least 740 points of credit score, which is why you should check your credit report beforehand.
Make Large Payment
For instance, you can take advantage of your home’s equity, meaning the best course of action is getting cash-out refinance that will allow you to borrow money against the value of your home, while repaying the old mortgage simultaneously. Afterward, you can use the funds for any purpose you prefer, such as:
- Renovating your household and boosting its curb appeal
- Paying off high-interest debt you currently have
- Invest in property that will offer you return on investment
- Paying college tuition
- Eliminate private mortgage insurance
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Change the Term or Structure
For instance, if you have paid a few from thirty-year mortgage you currently have, and you have entered a point of much higher salary and ability to spare more money for monthly installment.
If that is the case, we recommend you to refinance to a shorter loan term such as fifteen years, which will help you save money on interest rate, but will increase monthly installment. Still, you can get rid of mortgage faster than before.
Besides, if you have a variable-rate mortgage, you may decide to replace it with fixed-rate loan, which is vital to remember. That way, you can prevent potential fluctuation that depend on external factors, which will help you ensure the best course of action.
When Should You Avoid Refinancing
In most cases, you should avoid refinancing in these specific situations:
- Spending on Unnecessary Purchases – You should avoid falling into the trap of placing your home on line and get cash-out refinance with an idea to spend the money on holiday, vacation, or other unnecessary costs that you can handle by using other source of funding. One of the ways is to save enough to handle the costs, or you can use unsecured loans, which are safer because you will not risk your household for enjoyment.
- Choosing a Longer Term – For instance, if you have paid for almost fifteen years on a current loan, you may think that it is a good idea to reduce the monthly installments by prolonging the term. However, you have entered the point where more of your payment is going towards repaying principal than interest, meaning when you restart, you will start paying interest again.
- Shortening Term Without Savings – You may decide that your financial goal is to get rid of significant loan such as mortgage. However, you should think about other factors and financial goals such as retirement and savings funds, which may be affected by higher monthly installment that comes with short-term loans.
Check out mortgage calculator or refinansieringskalkulator that will help you determine whether you should refinance or not.
The Expenses You Should Expect While Refinancing
Refinancing requires some money you must pay throughout the process, meaning it may not be financially viable to some people. The most important expenses are closing costs that can vary based on the lender, location and other factors included.
We are talking about the fees that can go between two and six percent from the new loan balance, which is significant amount that may affect your savings. Numerous lenders will allow you to roll the closing costs into the principal balance instead of paying it upfront. In both cases, you must wait for a certain period until you break even with the process.
Therefore, you should calculate the amount you will spend on closing cost and compare it with the savings you make each month. Then you can determine how long you need until you recoup the costs. For instance, if the closing costs are two thousand dollars and you can save a hundred dollar per month, you will need twenty months to recoup the closing costs.
As you can see, you should think about each step before making up your mind. For instance, if your goal is to move from the household you refinanced in the next few years, then you should avoid it altogether.
Benefits of Refinancing Your Mortgage
Switch from Adjustable to Fixed Rate
For instance, if you have an adjustable or variable-rate mortgage, then your interest rate can go up or down based on current market conditions. At the same time, with an adjustable-rate mortgage, you will get introductory rates which will be lower than fixed option.
These introductory rates will last for a few years, while afterward the interest will depend on market conditions and external factors. It means you will get unpredictable monthly installment throughout the loan’s life.
Some people choose to get fixed rate, which allows them to ensure the same monthly installment until they repay loan, which is better for budgeting than other options.
Eliminate Private Mortgage Insurance
Another reason people choose to refinance is to reduce the private mortgage insurance, which is common problem among people who entered the loan without paying twenty-percent down payment initially, which created a need for PMI.
At the same time, some loan options come with mandatory insurance, meaning you can refinance them to ensure you reduce overall amount and rest assured.
