Are you considering whether it’s time to think about refinancing your home? You are not alone by any means. When you refinance your mortgage, that means you’re paying off the existing loan with a new loan. Homeowners will refinance their home loan for many different reasons, including:
- Getting a lower interest rate;
- Reducing the term of their home loan;
- Changing the type of loan (i.e., moving from an adjustable to a fixed rate); and
- Tapping into the home’s equity to use the funds to consolidate high interest debt, make a large purchase, or pay for an unexpected expense.
Many homeowners have recently become very interested in refinancing because of the recent COVID-19 pandemic. Interest rates have dropped significantly, saving a record number of borrowers money. Still, there are some costs to consider when refinancing a home loan. You generally have to pay for an application fee, new appraisal, title search, and other costs. It typically costs between 2 and 5 percent of the loan amount to cover all the fees, etc.
Those extra costs could make refinancing your home not as wise a financial decision as you originally thought. Or it can extend the amount of the time that you have to keep your home before you reach the “break even” point where you start saving on your mortgage costs. Let’s dive deeper to understand when the best time to consider refinancing your home could be.
The Best Times For Refinancing
Refinancing a home is a decision that’s most ideal in certain situations. One of the best times to refinance is when you want to lower the interest rate on your current loan. Because of the fees involved in refinancing, you should consider it when you will save at least 2 percent.
Some lenders will say that there’s enough of an incentive at 1 percent to refinance. That might depend on how long you intend to stay in your home and recoup the costs from refinancing. Run the numbers with a refinancing calculator to determine how much you will save in your situation.
Take the amount that you will save each month and determine how long it will take to reach your break-even point. That will tell you how long you would have to stay in your home at the very minimum before you would start saving money. For example, let’s say that your monthly savings is $300 per month with a refinanced loan. Your refinancing costs come to $3,000. It would take ten months to recoup the $3,000 costs. If you plan to stay in your home for at least another year or two, then it’s worthwhile.
Shortening Your Overall Loan
Another reason that many homeowners choose to refinance their home is to shorten the loan’s term. In a falling interest rate environment, you can oftentimes use the opportunity to shorten the term of the loan and not see much of a change in the monthly payment amount. You will want to calculate the numbers to make sure the new monthly payments will work for you.
For example, let’s say that you have a mortgage on a $100,000 home. The original mortgage term was for 30 years, at a 9 percent interest rate. You refinance to cut the interest rate down to 5.5 percent and a 15-year term. Your monthly payments go from the $810 per month to $825 on your new loan. You own your home faster, while reducing your interest costs for an extra $15 a month.
Converting The Type Of Loan
If you started with an adjustable-rate mortgage and want to switch to a fixed-rate, or vice versa, converting your loan could be a motivation. Adjustable-rate mortgage loans typically offer a lower interest rate than a fixed-rate mortgage for a certain period, such as 3 years. Then the interest rate will fluctuate based on market conditions. Converting to a fixed-rate mortgage can alleviate concerns of higher interest rates in the future.
It can also make sense if you have a fixed-rate mortgage and are planning to sell your home in the time that an adjustable-rate mortgage offers a lower rate. You get lower monthly payments and reduce the interest rate on your loan without having to think about what might happen in the future.
Refinancing To Tap Equity
Tapping into your home’s equity might be another reason to consider refinancing. Some reasons that people tap into their equity include:
- Paying for a child’s higher education;
- Paying for the costs of remodeling their home;
- Consolidating debt; and
- Paying for unexpected expenses like medical bills.
The interest rates on a refinancing loan that taps into your equity is often lower than other available options. Your home’s equity is an important financial asset. So, consider all your options to obtain funds before tapping into your home’s equity.
Work With The Refinancing Professionals
Mathis Title Company is here to help you through the refinancing process. We have decades of experience that gives us the knowledge to provide a unique perspective for each of our clients. Contact us today at 703-865-7880.