Deciding when you should refinance your mortgage is a big decision that should be carefully considered. If you are currently paying off a large home loan, refinancing your mortgage for even a small percentage difference in your interest rate can result in major monthly savings.
When deciding if you should refinance your mortgage, it's important to ask yourself the following questions.
1. Do you need to consolidate debt?
If you're struggling with debt, refinancing to pay off your highest interest loans can be a smart financial decision. With credit cards, for example, you may be paying as much as 20 percent interest, forcing you to spend more each month to cover the interest fees. Borrowing money cheaper means that it's possible to save more money, helping you pay off higher debts more efficiently. With current mortgage rates still competitively low, now is the perfect opportunity to consolidate debt.
2. How long do you plan to live in your current home?
You will need to pay closing costs if you decide to refinance. While refinancing your mortgage will result in a lower monthly payment, be sure that you will own your home long enough to cover these costs. To better understand this, calculate the point at which your decreased monthly payment will cover the cost of refinancing — also known as the breakeven point. If you plan on selling your home prior to the breakeven point, now may not be the time to refinance your mortgage.
3. How much can a lower interest rate save you?
Don't focus too much on how much interest rates have dropped. Instead, look at how much money you can save based on the rate change. A one percent interest rate reduction can provide a lot of savings on a $400,000 mortgage. Depending on your loan term, taxes, and insurance, you could be looking at $200 in monthly savings.
4. How much equity do you have in your home?
Always take equity into consideration when deciding to refinance your mortgage. The more equity you have, the better rates you can access. You can even avoid mortgage insurance. Home equity comes into play even more if your reason for refinancing is to access cash. As an example, owing $100,000 on your mortgage with $50,000 available equity may allow for a new loan of $125,000. With a lower interest rate, your monthly payments may stay the same while you cash out the extra $25,000.
Mortgage refinancing benefits
Once you feel good about your responses to the above questions, let's consider the benefits of refinancing.
Lower your monthly payment
Many homeowners refinance to lower their monthly mortgage payments. It's a great option if interest rates are lower than when you originally financed your home. It's also useful if you have an adjustable-rate mortgage (ARM) that will soon have a higher interest rate, or if you have private mortgage insurance that can be removed.
Homeowners can build equity faster if they're in a financial position financially to make a higher than usual monthly payment. This could allow you to switch from say a 30-year mortgage to a 15-year mortgage so you can build equity faster and save more money on financing fees. Plus, you can save significantly on interest payments.
Switch loan programs
The loan you started with may not suit you later in life. The good news is: you have options! Maybe you want to take advantage of lower rates. Or, maybe your ARM's fixed-rate period is about to expire. No matter what your need, you can trust there are a variety of loan programs that can be customized to fit your current stage of life.
If you are paying monthly mortgage payments on time, it can help boost your credit score. And the better your credit, the easier it is to refinance your mortgage for lower payments. Depending on your initial financial situation, you may need to invest in one type of loan program to build your monthly payment portfolio and improve your credit. This may include mortgage insurance. Though once your credit improves, you can refinance to a new program with a lower monthly payment.
Shorten your loan term
Many homeowners agree that being mortgage-free is an incredible feeling. While transitioning from a 30-year to a 15-year loan may boost your monthly payments, paying it off sooner saves significant interest over the life of the loan.
Try our mortgage refinance calculator
An easy way to see potential cost savings is to use a mortgage refinance calculator. You can adjust your interest rate or loan term to see how much you can save each month. Or, you can see the effect an additional mortgage payment has on your overall interest.
Now that you have an understanding of what's involved and the potential benefits, you should ask yourself: is it time to refinance? There's no right or wrong answer, of course, as it depends on each person's financial situation. So take the next step and consult with American Financing. You can receive answers to any additional questions you may have. You can even start the refinance process. Many customers are saving up to $1,000 a month. Why not see what we can do for you?