As a homeowner, you probably hear a lot about mortgage refinance — lenders claim you can get a lower interest rate, reduce the term length of your loan or cash out on some of your home’s equity. There are a number of possible benefits to refinancing your mortgage, but how do you know when it’s the right time to go ahead and do it?
It’s Time for a Mortgage Refinance if You…
1. Can get a lower rate on your existing mortgage. This is the number one reason why homeowners refinance mortgages. Reducing the mortgage rate on your loan by even just a bit can save hundreds of thousands of dollars in interest over the full term of your mortgage. Investopedia.com recommends refinancing if you know you can reduce your interest rate by at least 0.75-1 percent
2. Improve your credit. Even if you bought your home when interest rates were already low, improving your credit score significantly allows you to qualify for better mortgage rates now. If you have taken your credit from “poor” or “fair” to “good,” it might be worth applying for a mortgage refinance at a better rate.
3. Experience an increase in income. Another way to significantly reduce the overall cost of your mortgage is to cut the length of the loan. Shortening your mortgage term length allows you to pay less interest in total, and if you now make more money, you may be able to afford the larger monthly payments needed to pay down your loan faster. Just be sure that the increase in income isn’t temporary, and you can comfortably handle higher payments over the next several years.
Should I Refinance My Mortgage?
If at least one of the above statements applies to you, it’s not yet time to go out and sign on a new mortgage. When you refinance a mortgage, you must pay closing costs — just like when you first financed your home. You must be sure that the fees associated with a mortgage refinance don’t cancel out the savings you would enjoy.
Read the exact terms offered to you, and calculate how much you will pay on your current loan over the next 3 to 5 years. Then compare this to the amount you pay on a new proposed loan, including all fees. If the new loan is still a financial win, go for it.