Many lenders talk about the benefits of refinancing, but how do you determine if refinancing your mortgage is the right decision in the context of your personal and financial situation?
Review Your Current Mortgage
If your original down payment was less than 20 percent of your home’s closing price, it’s likely that your mortgage includes private mortgage insurance (PMI) fees. Oftentimes, these fees can be waived once you meet 20 percent loan-to-value (LTV) by making regular mortgage payments. But not all mortgages automatically discontinue PMI once you’ve reached the 20 percent threshold. Refinancing may be the only way to remove PMI charges from your mortgage and save money moving forward. If you’ve reached 20 percent LTV, calculate the amount you currently pay in PMI and how much you would save over the course of your mortgage if you were to refinance. If you’ve not yet reached the 20 percent threshold, estimate when you can expect to reach that point and consider the pros and cons of postponing refinancing until a later date.
In addition to looking at PMI costs, consider your existing loan type. If you currently have an adjustable-rate mortgage (ARM), the benefits of switching to a fixed-rate mortgage while interest rates are relatively low can be significant. Because federal interest rates are expected to continue rising in the coming years, a fixed-rate mortgage may ultimately provide greater long-term financial stability and cost savings over the course of your loan—even if it means accepting a slightly higher rate than what you’re currently paying.
Consider Your Personal Situation
If you’ve been making regular mortgage payments and practicing smart credit usage, your credit score is likely to be in better standing than it was when you were first issued a loan. In some cases, a lower credit score can help you qualify for a different loan program and lower your monthly payments.
Your financial situation and lifestyle may also have changed in the years since you acquired your mortgage. Maybe you’ve paid off your student debt in the interim and have better credit and greater monthly spending flexibility. Although shortening your mortgage term will likely increase your monthly payments, it will lower your interest rate and save you more money over the duration of your loan. On the other hand, if you’d like to improve your financial flexibility to accommodate a growing family or lifestyle change, switching from a 15-year mortgage to a 30-year mortgage can give you the leeway you need to live more comfortably.
A cash-out refinancing option is ideal if you’re considering using your credit card for big purchases like home renovations, weddings, cars, or school payments. Because mortgage interest rates are usually much lower than those charged by credit card companies, borrowing from your mortgage using a cash-out refinancing option may protect you from accruing massive debts.
Don’t Ignore Timing
If you’re considering refinancing your mortgage, don’t forget to think about timing. Refinancing comes with certain closing costs, so refinancing more than once in a limited time period isn’t cost-efficient. Refinancing sooner rather than later can help you lock in a lower fixed-rate mortgage before interest rates rise, but doing so before you’ve had the time to improve your credit score or reach 20 percent of your LTV might mean sacrificing other potential savings opportunities. Weigh any anticipated lifestyle changes against the pros and cons of refinancing at different times to determine the most optimal window.
Know the Numbers
To ensure refinancing is worth your while, find out what refinancing will cost you and calculate how long it will take you to break even. If you don’t plan on keeping your home for at least a couple of years after refinancing, you may find that the closing costs outweigh the benefits. If, on the other hand, you plan on staying in your home long-term, refinancing now can save you a significant amount of money over the course of your loan.
Weighing the potential savings and costs of refinancing can be difficult without the right tools at your fingertips. Reach out to one of our experts to gain a more accurate understanding of the costs involved with refinancing your home and what benefits you might qualify for.