Refinancing your home loan can save you thousands throughout your loan if done correctly. One of the trickiest parts of refinancing is simply deciding if and when you should refinance. To help you make the right decision to save the most money, we’ll explain when you should refinance your mortgage.
When you refinance, you replace your original mortgage with a new mortgage. The new mortgage money is used to pay off the old loan, and you resume payments on the new loan.
Refinancing does come with costs, so you want to be sure that you are truly saving money and can recoup the costs before you refinance.
Reasons to Refinance Your Mortgage
Usually, you refinance because the terms of the new mortgage are better in some way, either because of a lower APR, shorter term, lower monthly payments, or a combination of the above. Here are some ways this might happen.
Interest Rates Have Dropped
One of the most common reasons you might want to refinance their mortgage is that interest rates have dropped since you took out your original mortgage. To know when rates drop so you can be ready to refinance, monitor the U.S. prime rate and mortgage rates. There are also online tools where you can subscribe to keep tabs on interest rates.
Your Credit Score Has Significantly Improved
If your credit has substantially improved since you got your original mortgage, you may be able to refinance for a much better rate now.
Your Monthly Payents are Too High
If your financial situation has changed and you are finding it challenging to meet your monthly mortgage payments, refinancing might help you. Depending on the length of your loan, a refinance can allow you to spread out payments over the life of a longer loan and give you monthly savings.
You Want to Shorten Your Term
If interest rates have dropped, or your financial situation has changed so you can afford to pay more each month, you might want to consider refinancing your mortgage to shorten your term. This will save you money over the life of the mortgage, as you will be paying interest for a shorter amount of time.
You Want to Take Advantage of a Cash-Out Refinance
A cash-out refinance is a way to pull equity out of your home. Essentially, you take out a mortgage for more money than you owe on your house. The difference between what you owe and what you take out is surplus, which can be deposited in your bank account for you to use.
Factors to Consider Before Refinancing
If you think that refinancing can meet your goals, be sure to consider a few other things.
How Much it Costs to Refinance
Refinancing costs money, and it can take several years to recoup the costs. You’ll want to check into the costs of the mortgages you are considering. You can usually expect to pay 3-4% of your mortgage principal in fees to refinance. These fees include any early repayment fees, appraisals or inspections, and application and origination fees.
How Long You Will be in the Home
Because refinancing is not free, you will want to make sure that you can make back the money you spend before you do it. So you’ll need to know how much it will cost to refinance and how much you will save monthly. Comparing these numbers will help you find your break-even point.
How Much Money You Will Save
Overall, the goal of refinancing is to save money. Refinancing can save you thousands if the conditions are right. The best way to find this out is to use a mortgage calculator and compare different interest rates, options, and costs of refinancing options.
If you’re ready to begin the process of refinancing, the best thing you can do is spend some time comparing various mortgages. We welcome you to start here with Best Reward Federal Credit Union. Our goal is to provide the highest level of service and competitive rates.
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