There are many reasons a homeowner might consider refinancing a mortgage: to obtain a lower interest rate, to shorten the term length of the mortgage, to consolidate debt, to tap into home equity to finance a large purchase, or to convert from an adjustable-rate mortgage to a fixed-rate mortgage (or vice versa). When you refinance a mortgage, you’re paying off an existing loan and replacing it with a new one, with different terms and rates. Seems simple, right?
The thing is, there’s timing involved. If you don’t do your homework and research the housing market, you could end up costing yourself money instead. Maybe you’ve been considering a refinance for a while now. Maybe you’re thinking about your child heading off to college and that big tuition bill. Or maybe you want to complete a big remodeling project that will increase the equity in your home. You could simply want a lower interest rate. Is now the time?
Make Sure That Refinancing Is a Sound Decision for You
Refinancing a mortgage can cost between 3 and 6 percent of a loan’s principal, and as with the original mortgage, it will require an appraisal, a title search, and application fees. Make sure that you’re okay with all of that before you head down the refinancing path.
The Reduced Interest Rate Should Be Worth It
Experts recommend that you should be sure that, if you’re approved for a refinance, you can reduce your interest rate by at least 2 percent. However, some lenders say that a 1 percent savings is enough of an incentive, so do what works best for you. Just remember that you want as much savings as possible. A refinance for the same interest rate is pointless and will cost you money. Remember that some money will be added to the principal, and you’ll have to pay for those application fees and inspections all over again.
Essentially, you want to refinance a mortgage when the interest rates are low. When interest rates drop, you can refinance to shorten the term of your mortgage and pay less in interest payments. Your monthly payments might increase, but usually, it won’t be by much.
Consider How Long You Intend to Live in the Home
There are different strategies here, depending on whether you’re paying for your forever home or a home you intend to live in for only a few years before reselling. If you don’t intend to live in the house very long, you may not want to refinance at all because you won’t be able to recoup those savings over that (relatively shorter) period of time.
Think About Whether It’s a Fixed- or Adjustable-Rate Mortgage
Depending on what interest rates are doing, it might be a sound financial decision to convert from one to the other. For instance, if your mortgage is an adjustable-rate loan, periodic adjustments could result in gradual rate increases over time. Converting to a fixed-rate mortgage results in a lower interest rate and gives you peace of mind because there won’t be unforeseen future rate hikes. It’s like the difference between being on a month-to-month agreement with your landlord and being on a fixed, year-long lease. For the length of that lease, you don’t have to worry about your monthly rate because it’s always the same. Converting to a fixed-rate mortgage is good if you intend to live in the house for a long time.
If your mortgage is a fixed-rate loan and interest rates are falling, it might be a good idea to switch to an adjustable-rate mortgage. You’ll pay less in interest and smaller monthly mortgage payments. Plus, you won’t need to refinance every time the rate drops. However, if the mortgage interest rates are rising, you want to stay away from an adjustable-rate mortgage since your payment will increase more often. This is a good strategy for a house you intend to live in for a shorter length of time since you’ll theoretically be able to pay it off sooner.
Mortgage rates are influenced by economic factors, such as inflation, the housing market, and the bond market. As of October 2019, Forbes reported that mortgage rates are trending lower and that the trend will continue through at least the early part of 2020, and probably beyond that. More people have been refinancing recently because of these low rates. Refinance activity was 133 percent higher in 2019 than in 2018.
What Other Factors Matter?
Another thing to consider is your credit score. If your credit wasn’t great when you received the original loan but you’ve been able to improve your credit score since then, it might be a good time to think about refinancing. You may get a lower interest rate, which will mean you can pay off the loan faster.
In a very bad situation, such as if you’re going through a bankruptcy, refinancing may ease that burden. There’s a waiting period after your bankruptcy discharge date, which can be one to five years, depending on the type of bankruptcy. Check with your financial institution or a financial advisor before applying so that you know you’re in safe hands and that refinancing can be an advantage to you. The advantages of refinancing after bankruptcy, in general, include having more manageable payments and lower interest rates, and you might qualify for a cash-out refinance, which will allow you to put some cash toward debt payments. You’ll be able to improve your credit faster that way as well.
We hope this has given you some direction if you’re interested in refinancing your mortgage. Visit us online or in-person at a Rivermark Community Credit Union near you. We can answer any further questions you might have about the whole process. We have a lot of resources available on our learning page as well.
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