With everything that’s going on in today’s world, refinancing your home mortgage might not seem like the biggest priority in the world. However, low rates mean this could be one of the best times in recent history to give it a try. Is it the right move for you?
Smart Reasons to Refinance
When it comes to debt, a mortgage is the typical household’s largest payment. And in most cases – at least for homeowners who are still in the early years of borrowing – interest makes up a healthy portion of the monthly payment. Thus, anything that can be done to lower the amount of interest paid should be considered. The most common option is to refinance to a lower rate.
“Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment,” Investopedia mentions. “For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1% reduces your payment to $483.”
It’s not unheard of for homeowners to shave $300, $400, or even $500 off of a mortgage payment simply by refinancing – especially in today’s market! Plus, many companies now give you the opportunity and ability to complete much of the refinancing process online.
Sounds great – but how do you know if it’s right for you? Here are a few signs:
- Low Rates
A rate that’s lower than your current interest rate is the first and most obvious sign that it’s time to refinance. If you can shave at least 1 percent off your rate, it’s typically worth refinancing. (Some even advocate for refinancing if you can secure a rate that’s half a percentage point lower.)
- Credit Score Has Improved
Has your credit score dramatically improved since you bought your house? If you had a 650 credit score when you first signed the mortgage note and you now have an 804 credit score, you’ll almost certainly qualify for better terms. Refinancing could save you some serious cash each month.
- Long-Term Plans to Live in the Property
Refinancing requires you to pay closing costs and fees – often amounting to several thousand dollars. Therefore, you shouldn’t refinance if you’re planning to move out in the next couple of years. If, however, you have long-term plans of remaining in the property, a refinance is probably a good bet.
The best piece of advice is to calculate the break-even point of when your monthly interest savings equals the upfront closing costs. If you plan to be in the house longer than this, a refinance makes sense.
- Need for Lower Payments
Do you need lower payments to ease your and provide room in your budget for other critical expenses? Refinancing your mortgage is a simple way to ease your financial situation and provide peace of mind.
Steps to Take When Refinancing
Refinancing a home loan isn’t an overly complex process, but it does require some careful attention to detail. You’ll need to:
- Shop around for rates from different mortgage providers. This can be done online or by working with a broker who has access to different rates from different lenders.
- Analyze all of the key details of loan options to make sure you’re comparing apples to apples. This means exploring the type of refinance, type of loan, term, rate, credits versus points, closing costs, etc.
- When you find a rate that works for you, it’s best to go ahead and lock it in. This allows you to secure the current rate, even if it goes up prior to closing.
- You’ll have to go through an underwriting process, so be prepared with all of the right documentation and records (including tax returns, W-2 statements, 1099 forms, bank records, etc.).
- After approval, it’s time to schedule closing, get funding figured out, and finish the process.
Don’t let the different steps and requirements scare you away. While it can take some energy and effort to refinance, it’s almost always worth it in the end. Keep the long-term perspective in mind and practice patience.