As the mortgage rates start to drop, many homeowners quickly rush to refinance their mortgages and loans. Even if the refinancing activity is soaring in the industry, it doesn’t mean it’s a good option to take the plunge yourself as well. Being aware about when you should refinance your mortgage is a trick that not everyone can master, but you can sure try to!
Here is a complete guide by the end of which you’ll know when to refinance your mortgage.
When Should You Refinance Your Mortgage?
On a general basis, you should consider refinancing your mortgage if it will reduce your monthly expenses and help you build equity so that you can pay off your mortgage faster. When the rates quite low, even those who have taken out reasonably new mortgages can profit from refinancing.
You should also consider opting for refinancing if you are able to bring down your interest rate by a minimum of one-half of a percentage point as it can help lower your monthly payment considerably.
You also need to ensure that your total monthly savings help offset the refinancing cost. It may not be the best idea if you’re planning to move from your current residence in the next two years.
The question of whether you should refinance or not isn’t just about the current interest rates; it also relies on your credit check that can qualify you for the best refinance loan. There are many factors such as yields on long-term Treasury bonds that determine the mortgage interest rates, and the best rates go to those who have the best credit.
Your fiscal objectives, how much equity you have in your home, the time you plan to stay in your current home, and your overall monetary situation are pivotal factors to consider when it comes to deciding whether you should refinance your mortgage or not.
Here are three main questions to ask yourself when you’re planning to refinance your mortgage.
1. What Do You Stand To Save By Refinancing?
There are two major reasons for you to consider refinancing. Firstly, you may want to reduce your monthly mortgage, and secondly, you may want to save on the overall interest you will pay for your home in the long-term. Given the best case scenario, refinancing can help you achieve both, but not everyone is lucky enough to experience that.
Your mortgage broker or loan offer can give you a clear picture of various scenarios to give you an idea about the cost and potential savings of refinancing. It is important to remember that refinancing can be costly: it includes application and origination fees, home appraisal fees, and sometimes, even mortgage points for a lower interest rate.
2. How Long Will You Keep Your Home?
Generally, it makes sense to refinance your home only if you plan on spending a few more years there. If you’re planning to sell off your property sometime soon, then refinancing is pointless. A majority of refinances take at least a few months, if not years before they break even and start saving you money. The general recommendation is to avoid refinancing if you’re planning to leave your home within the next five years.
3. Will You Qualify For Refinance?
In the case that a refinance is a sensible option for your current situation, you will still need to qualify for it. You won’t receive your refinance approval solely because you have a home and are making timely payment. Your ability to qualify for a mortgage refinance depends on a few other factors:
- Your credit
- Your equity in your house
- Your income
Applying for a mortgage refinance is a whole new process. Your bank will evaluate the above-listed items to see whether you qualify or not. They will see your creditworthiness alongside evaluating whether the value of your home is worth more than the loan value, and whether you can afford the monthly payments or not.
How Does Refinancing Work? Is it Worth it?
There are many ways through which you can refinance your mortgage. Finding the ideal loan for yourself largely depends on your objectives. While some people want to move from an adjustable-rate mortgage to a fixed rate mortgage with a fixed monthly payment, others want to reduce the term of their loan and slash it by have to save themselves from interest charges.
Most homeowners choose a straight rate refinance to reduce their interest rate and have a contented repayment term. Some people also want to reduce their monthly payment in order to free up their monthly income for other expenses such as an auto loan or college tuition.
How Much Time Does It Take To Refinance?
The amount of time required to refinance your mortgage depends on not only your lender, but various other factors as well. The time taken to refinance a mortgage is determined by the time it takes to conduct inspections, credit checks, appraisals, and other requirements. However, it has become quite easy to apply for refinancing as technology has tremendously streamline the mortgage process. Many lenders have websites that provide you with detailed information about various loan options. They also allow you to compare interest rates, fill applications, and even submit documents. By doing so, most refinances can be approved with a month.
The Bottom Line
The decision of refinancing is no small decision. So, you shouldn’t just jump on the bandwagon because other people are doing it. Everyone has a different situation, so it’s best to consider your own situation and evaluate likewise. However, generally, you should refinance your mortgage if the current interest rates at least 1% lower that your existing rate, you plan on staying in the same house for at least another five years, and you think there’s a high chance that you’ll receive approval for your refinance loan.