You work hard every month to make your mortgage payment. But is your mortgage working for you? It just might be time to consider refinancing.
Refinancing means you’re swapping your existing mortgage loan for another. And since there typically are fees involved with refinancing, you’ll need to recognize a benefit — one that saves you money each month on your payment or puts money in your pocket.
What are the financial signs it’s time to refinance your home? Read on to find out.
Lower Interest Rate
As of Oct. 20, rates on a 30-year mortgage averaged 3.18%. If you’re paying more than that, it’s worth looking into refinancing.
“Yes, there will likely be closing costs, but if you find you can lower your mortgage by 0.5% or more, you could potentially save hundreds of dollars per month or tens of thousands of dollars over the lifetime of your mortgage,” said David Friedman, the co-founder and CEO of Knox Financial.
How much money could you save?
The principal and interest due in a 30-year, $300,000 mortgage taken out at 3.18% APR is $1,294 per month. If you’re paying 4.5% APR, the total is $1,520 — a difference of $226. Refinance 10 years into your mortgage? You’ll save $54,240 over the next 20 years.
“Interest rates have been dropping for some time now, and current logic suggests that they might increase soon. If homeowners haven’t taken advantage of these low rates by refinancing their loan, it might be the right time to do so,” said Jeff Zhou, the co-founder and CEO of Fig Loans.
Replace an Adjustable-Rate Mortgage
If you took out an attractive adjustable-rate mortgage (ARM) when you bought your home and it’s nearing the time to adjust — and trigger an increased interest rate — consider refinancing.
“If you have had an adjustable-rate mortgage and getting worried about the future rise in rates, moving to a fixed-rate mortgage may be a good idea,” said Shashank Shekhar, the founder of InstaMortgage. “This is recommended if you plan to keep the mortgage for a very long time. Since the FRM rate is at a very low level, locking in a low fixed rate for the life of the loan gives you peace of mind and a good night’s sleep.”
That is the strategy if you plan to stay in your home for years to come. If that isn’t likely, Shekhar said refinancing into another ARM will save you money on interest.
Shorten the Length of Your Mortgage
When you bought your home, an option available to you was a 15-year mortgage instead of a 30-year loan. A 15-year loan option came with a lower interest rate but a higher monthly payment, so you might have passed. But once you’re a few years into your mortgage, you might just find that your income has increased, and you can afford to pay more each month – especially if the tradeoff is paying off your home sooner.
“If you believe you’re living in your forever home and paying your mortgage in full is one of your financial goals, you may be enticed to use a 15-year mortgage,” said Brian Walsh, the senior manager of financial planning at SoFi. “A shorter term can save you a significant amount of money over the duration of your mortgage loan if you can comfortably afford the change in monthly cost. Shortening your term will likely cost more monthly but can save you thousands of dollars in interest over the life of the loan.
While your savings and benefits depend on when you convert from a 30-year to 15-year loan, know this. Taking out a new 15-year, $300,000 loan at the mid-October average rate of 2.46% would save about $107,000 over a 30-year loan.
Credit Score Boost
At the time you took out your loan, your credit score might not have been tip top, but it is now. It could be to your benefit to refinance.
“If your credit score has gone from good to very good, or even exceptional, then it might be the perfect time to refinance your home,” said Marina Vaamonde, a real estate investor and founder of PropertyCashin. “The lowest mortgage rates are reserved for those with the best credit scores. Perhaps you’ve been making your payments steadily for a couple of years, paid your debt and haven’t bothered to check your credit score. If you’ve entered the thresholds of 740 or higher, you might just be in line for a better rate on your mortgage.”
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Shift From an FHA Loan to a Conventional Loan
Buyers with a low down payment amount and a credit score that isn’t perfect often buy their homes with an FHA loan, which is backed by the Federal Housing Association. When you take out an FHA loan, you’ll be required to pay a MIP — a mortgage insurance premium — to qualify for a loan. Rocket Mortgage says you should expect to pay an upfront premium of 1.75% of the loan value — it can be added into the total loan — as well as a monthly fee. The amount depends on the length and amount of your loan and can range from 0.45% to 1.05% of the loan value. That could add hundreds to your monthly payment.
If your credit score has gone up since you took out your loan, you could consider refinancing to a conventional loan once you reach 20% equity in your home. That will eliminate the need to pay the mortgage insurance premium each month. And with the skyrocketing housing prices over the past year, you could reach that 20% mark quickly. In September, the national median listing was $380,000, an increase of 8.6% over 2020 and up 20.6% compared to 2019, Realtor.com reported.
Every homeowner has a different financial situation, but refinancing could help you save on your monthly housing costs. A meeting with a loan officer can help you to figure out if refinancing is right for you.
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Last updated: Oct. 26, 2021