How to Know If It’s a Good Time to Refinance Your Mortgage

mortgage interest rates

Maybe you are considering refinancing your mortgage. You may be wondering if this is the right time or if rates are going to go even lower in the future.

Asking yourself if it’s time to refinance your mortgage is normal. It’s a hard thing to know when is the best time to take the plunge because none of us know the future.

Refinancing means paying off a mortgage loan with brand new refinancing and at a lower rate or with other favorable terms. To be on the safe side, only consider refinancing if you are sure it benefits you in one way or the other. Here are tips to help you if you are considering refinancing your mortgage:

You can make smaller payments

This applies when interest rates fall. When you refinance the loan to a lower interest rate, you may get to pay lower monthly payments.

Find some mortgage calculators online and do some research with different interest rates and loans of different time periods (i.e. 15 year, 30 year) and see which math works out best for you.

Don’t just assume because you have a lower interest rate that you will end up paying less money. That may not be the case if you extend your mortgage to a longer time period than the mortgage you are currently paying on.

Some people want to refinance their loan into a 15 year fixed loan because it generally offers a better interest rate than a 30 year fixed loan.  One advantage of a 15-year loan is that you may be able to pay off your mortgage more quickly. This may allow you to pay off your mortgage before you retire when your income may decline.

Other people say it’s best to get a 30 year fixed loan with a higher interest rate and make extra payments when you are able, so you can pay down the principal early. The advantage of the 30-year loan is that if you run into hard times and have a dip your income, you won’t have the added pressure of the 15-year loan monthly payment which would be higher than the 30-year monthly payment.

This is a personal decision that you will have to make based on your situation and what you are comfortable with.

The interest rate on your home should be reduced by at least 1%

There might not be a one size fit for loans, but the general rule of thumb is that, before refinancing, you should at make sure your current interest rate can be reduced by at least 1%. This helps you to break even on your loan after the refinancing closing costs. However, what works for you depends on factors such as loan amount, fees, interest rate and more. Do your calculations to make sure you can break even on the loan on a timeline that best suits you before you consider refinancing. Once again, find a good online mortgage calculator to help you crunch these numbers.

When you can tap equity

If you have gained ample equity in your home to refinance into a loan without requiring mortgage insurance, you might want to refinance. You can access the equity on your home to cover a major expense that may justify the refinancing. For instance, doing something like remodeling (or adding a home extension or granny flat) adds value to your home and the interest rate on the mortgage may be less as compared to interest from cash borrowed from somewhere else.

Refinancing has its own advantages and disadvantages. Refinancing may be appropriate for you if it shortens your loan term, reduces the mortgage payment, or enables you to build equity quickly. If you use refinancing wisely, it’s also a great tool and can help you bring debt under control. Before you start on the refinancing process, take a good look at your financial situation and ask yourself, how much money do I stand to save through refinancing? How long do I plan to live in the house? These questions will well help you make decisions in regards to your refinancing questions.


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