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Is Now a Good Time to Refinance my Home Loan?

The question of whether the time is right to refinance a mortgage or not is one that homeowners often wrestle with. When interest rates are low, it’s difficult to know whether they’ll hold at that level and for how long. While many consider refinancing to be the best way to save money on a monthly mortgage payment, refinancing at the wrong time may actually end up costing you money. Knowing the right time to make a move is challenging.

Refinancing Defined

Refinancing a mortgage simply means that you take out a new home loan to pay off the old one. There are several reasons why you might want to do this. Lowering the interest rate is one of the most common. Refinancing to a lower interest rate reduces the monthly payment and eases the burden on your household budget. Shortening the term of the loan is another reason many homeowners refinance. The sooner you can pay your house off, the better because you’ll pay less in interest over the life of the loan. A third reason for refinancing is to switch the type of mortgage you have from an adjustable-rate mortgage to one with a fixed rate or vice versa. And finally, many homeowners decide to refinance because they need extra cash for some other use, such as debt consolidation or home repairs.

Assessing Your Decision

There are several things to consider when trying to assess whether it’s a good time to refinance or not. There are costs associated with refinancing. These costs – for items like an appraisal, title search, and application fees – can vary from 3% to 6% of the loan’s principal. Your decision on whether it’s a good time to refinance or not needs to take these costs into account. Also, you need to have a good feel for how long you plan to live in the house. If you’ll only be there another year or two, it may not be worth it, because you may not have time to recoup your refinancing costs.

A Closer Look at Refinancing

To determine whether now is a good time to refinance your home loan, we need to take a closer look at the reasons people refinance. There may be something here that will help guide you in your decision-making process.

Refinancing to Lower the Interest Rate

If interest rates are on the downswing, you might want to look into refinancing. Obtaining a home loan with a lower interest rate can help you save money by lowering your monthly payment. But how do you know if interest rates have dropped enough to make this worth your time? The rule of thumb generally states that if you can lower your interest rate by 2% or more, refinancing is beneficial. However, some financial experts say that a drop of only 1% is worth considering. This is why it’s important to know your current interest rate. Have a mortgage professional run the numbers for you to determine the impact of refinancing. 

There could be another benefit to lowering your interest rate. Many homeowners with conventional mortgages pay private mortgage insurance (PMI) on their loan if they didn’t make a substantial down payment. When you lower your interest rate, you build equity in your home faster because more of your monthly payment goes to the principal rather than interest. The faster you build equity, the quicker you’ll get to 20% equity, the magic number that allows you to drop the PMI, thus saving even more.

Refinancing to Shorten the Term

Shortening the term on a home loan, even by a few years, can save a considerable sum over the life of the loan. However, if you don’t lower your interest rate at the same time, your monthly payment could actually go up. If you can afford that, it may still be a wise thing to do because you’ll save money over time. The ideal scenario is to lower both the interest rate and the term when you refinance. You may be able to shave years off the loan while keeping your monthly payment very nearly what it is currently.

Refinancing from an Adjustable Rate to a Fixed Rate – or Vice Versa

Often, adjustable-rate mortgages start with lower interest rates than fixed-rate mortgages. But over time, the interest rate adjustments may climb to the point that they overtake the rate offered on a fixed-rate mortgage. When this happens, it’s a good time to consider refinancing. Refinancing to a fixed-rate mortgage eliminates the uncertainty that comes with fluctuating interest rates. Conversely, if interest rates fall below the rate on your fixed-rate mortgage, you may want to consider refinancing to an adjustable-rate mortgage and ride the rates downward. This is an especially good strategy if you plan on living in your home for only a few years.

Refinancing for Extra Cash

Refinancing can be a viable option if you need extra cash for major expenses like remodeling or home repair projects, paying off or consolidating consumer debt such as credit cards and car loans, or paying college expenses. Refinancing your home loan is an excellent way to tap into the equity you’ve built up in your home and put it to good use. But make sure you’re smart about the decisions you make. A mortgage loan officer can help you weigh the pros and cons of refinancing to determine whether it’s the best option for your situation.

Homestead Financial Mortgage is Here to Answer Questions

Knowing the right time to refinance is challenging. Homestead Financial Mortgage is here to help you weigh the options. Our goal is to help homeowners understand the refinancing process and figure out whether the time is right to refinance. We work with customers in St. Louis, MO, Kansas City, MO, Overland Park, KS, Godfrey, IL, and Glen Carbon, IL, as well as the surrounding metro areas. Give us a call or stop by one of our branches to talk with our mortgage experts. We’ll help you decide whether now is the right time for you to refinance.