With all this talk of interest rates dropping and the housing market shifting, you might be thinking about refinancing your home. And that could be a good idea! However, before you launch right into taking out a new home loan, let’s look at some of the basics about when you should refinance.
Mortgage Rates
You probably remember this from when you took out your mortgage: you borrowed money at a set interest rate, which impacts your minimum monthly payments as well as the amount of time it’ll probably take you to pay the loan off. However, interest rates are always changing, and things could be different for you now than when you borrowed the money.
Benefits to Refinancing
There are a few other benefits to refinancing. For one thing, refinancing gives you a chance to get a better interest rate on your loan. You could also theoretically tap into the equity of your home with a new loan at an updated valuation. Finally, you could move from a variable interest rate to a fixed rate instead.
Refinancing
Refinancing your house is much simpler than it might sound at first. It works like this. You own your house, but you owe a bank some money still for your mortgage. You can get a loan from a different bank at a new interest rate and use the money you borrowed to offset your loan from the first bank. Thus, from your point of view, the only real change is the interest rate.
Closing Costs
Remember that there are closing costs associated with getting a new loan for your home. As such, it’s not as simple as just looking at the interest rates from when you financed your home and comparing them to now. There’s some math behind when the right time to refinance is, including how long you intend to live in the home, how much you still owe on it, and how much you stand to gain by refinancing.
Interest Rates
Once interest rates are around one half to three quarters of a percentage point lower than when you financed your home, you stand to save some money by refinancing. Notably, if your credit score has improved since you borrowed money for your home, you could personally qualify for an even better rate than the average!
Cash Out Refinance
If your home is worth more now than it was when you bought it, you could get a loan against its current value. This is called a “cash out refinance” and basically lets you tap into the value of your home at any time. People usually use these types of loans to pay for things like home renovations, kids’ college, or high-interest debts from other institutions.
Private Mortgage Insurance
If you’ve got Private Mortgage Insurance, or PMI, on your loan, you might want to look into getting rid of that. You’re paying into insurance that you might no longer need depending on how much your home’s value might have increased. Getting a new loan to shake off PMI could get you ahead of schedule in paying your home loan back.
Loan Term
Let’s say you agreed to a 30-year mortgage and you’re now in a different financial position. You might find you could pay off your mortgage much sooner, so you switch to a 15-year term to save considerable money on interest by making slightly higher monthly payments. That’s a good deal!
Read More: 10 Questions to Ask Before Taking Out a Personal Loan
Avoid the Traps
Don’t take a cash-out refinance just to pay for a lavish vacation. You need that extra value! Just save up your paychecks for these kinds of things. Also, make sure you don’t refinance to a longer term, especially if you’re already a good amount of time into repaying the loan. Restarting the clock on your interest rates is counterproductive for your finances.
Read More: The Best Way to Pay for Home Renovations
Saving Money
The real answer to the question “when should I refinance” is “when it would save you money.” Do your research, find out how much you could stand to gain by refinancing, and shop around for the best interest rate. Don’t let your refinancing cost you more in the long run than just keeping your loan how it is, either!
Read More: 10 Things to Know Before You Refinance Your Mortgage