The real estate market has been on a wild ride since the outbreak of the COVID-19 pandemic. Not only is there an extreme seller’s market with low inventory, historically low interest rates, and high sales prices in many locations, there’s also been a refinancing boom.
With everyone talking about refinancing, you might be wondering what it means to refinance your mortgage and whether or not it’s the right choice for you.
Doing your research is essential on this question because it isn’t always advantageous for everyone to refinance. Whether or not it makes sense has to do with a number of factors regarding your specific circumstances.
Not sure if you should refinance your mortgage? Let’s take a look at what you need to know to help you decide.
What Is Refinancing?
When you refinance your mortgage, it means that you are replacing your existing loan with a new one. Basically, you are reapplying for a brand-new mortgage for your current home.
Some of the common reasons that someone might choose to refinance their home include:
- Getting a lower interest rate
- Eliminating private mortgage insurance (PMI)
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage
- Lowering the monthly payment by increasing the term
- Shortening the term of the mortgage in order to pay it off sooner and pay less in interest over time
Refinancing your mortgage offer you an opportunity to change the structure of how you pay down your mortgage. You might be able to spend less money in interest over time, lower your monthly payments, or even use a refinance in order to take out a cash loan.
Wondering what your home mortgage loan options are? Check out https://www.farmersbankidaho.com/home-mortgage-loan-options.
Should I Refinance My Mortgage?
Everyone’s situation is going to be different, and refinancing may not always be the right decision. Let’s take a look at a few questions you’ll want to ask yourself before applying for refinancing.
How Long Do I Plan on Staying In This House?
It is not free to refinance your home mortgage. If you are considering moving out of your current home sometime in the next three years, you might not live in the home long enough to even cover what it cost you to get a new loan. It’s important to determine what your breakeven point would be so you can figure out whether or not refinancing would save you money depending on how long you plan to stay on the property.
Where Does My Mortgage Stand Now?
You’ll want to consider a number of factors when deciding whether or not to refinance. Your current interest rate isn’t the only thing to think about. You should also incorporate your payment amount, your principal balance, and the time left on your loan.
For example, if you have a low principal balance, refinancing might not benefit you. This is because at this point most of your monthly payment is going to the principal rather than interest.
How’s My Credit History?
In order to refinance your mortgage, you will need a good credit score. If you have a high amount of debt compared to your income or you have missed payments on bills, you might not end up qualifying for appealing interest rates.
Do I Have the Time and Money to Refinance?
When you refinance your mortgage, you pay closing costs much like you did when you got your initial home loan. How much this will cost you will depend on the size of the loan, the type of the loan, your lender, in the state that you live in. According to Freddie Mac, the average closing costs for a refinance are about $5000.
Sometimes a lender will allow you to bundle these costs into your loan. However, this means you will be paying a larger principal balance will be paying interest on the closing costs.
It is also time-consuming to refinance. You will have to collect documents, meet with lenders, and dig up paperwork that mortgage providers request. Before starting to refinance, ask yourself whether or not you have the time and money to invest.
When to Refinance Your Mortgage
The right time to refinance is only when it’s right for your particular financial situation. Experts often suggest that savings of at least half a percent help mean that refinancing is worth it
You might consider refinancing if mortgage rates have gone down. You’ll want to do the math and make sure it works out in your favor, but it’s possible that you could save thousands of dollars in interest by refinancing.
Another time you might want to refinance is if your credit has improved. If you got your initial market when your credit wasn’t great, you probably didn’t get the best interest rate. With improved credit, you can improve the terms of your mortgage.
If one of your goals is to pay off your debt and own your home outright, you might think about refinancing in order to shorten the length of your loan. While this will mean higher monthly payments, it will mean paying less interest in owning your home in full sooner.
Some people might choose to apply for a cash-out refinance in order to pay for things like home improvements or to pay off other debts. Since home loans tend to have lower interest rates than other types of loans, some people use this as a debt consolidation tool.
Is It a Good Time For You to Refinance?
As you can see, refinancing a home loan is a great idea in certain circumstances and not the best use of your time and money in others. While crunching the numbers on your mortgage loan might not be your favorite way of spending time, doing so might lead to you saving thousands of dollars over the life of a loan.
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