Perhaps you’ve thought about refinancing your mortgage, but you’re unsure whether or not it’s the right move. Maybe you’re asking yourself if it’s the right time, and wondering if rates will stay low, go lower or even begin to rise.
Truth is, sometimes it’s hard to know when to take the plunge.
Whether you bought a home recently or many years ago, you probably noticed that mortgage rates stayed near historic lows in early 2021.
As with any financial rate or data point, it is hard, if not impossible, to predict the future or time the market.
Often, homeowners refinance when it can benefit them in some way, such as with a lower monthly payment or better terms such as a shorter term (e.g. 15 years instead of 30).
Whatever your reasons for considering a refinance, the following signs could be an indication that now is the right time for you.:
1. You’ll be able to break even fairly quickly
In general, refinancing a mortgage costs between 2% and 5% of the principal amount borrowed. Therefore, if you are refinancing to save money, make sure the math checks out before you decide to go ahead with it.
There are many calculators online to help you figure out your break-even point, but the formula is simple.:
Break-even point = Total closing costs ÷ Monthly savings
The figure you get tells you how many months it will take to recoup your costs to refinance.
2. Your interest rate can be lowered by at least 0.5%
You may have heard conflicting opinions about the right time to refinance. This is because there is no universal answer; loans and goals differ for every individual.
A standard rule of thumb is that a mortgage rate should be reduced by at least two percentage points from the current mortgage rate.
However, depending on variables such as loan amount, interest rate, fees, and so on, different solutions might work for different people.
Increasing mortgage sizes and lower closing cost options have changed that common guideline. Even a change of 0.5% can result in significant savings for a large mortgage, especially if the homeowner can avoid or minimize lender fees.
3. You are interested in securing a fixed interest rate
An adjustable-rate mortgage may be attractive because the rate is lower (at least initially) than that of a fixed-rate mortgage on the same property. But, as the name suggests, the rate will change based on market fluctuations.
But if you refinance to a fixed mortgage, you’ll be protected against rate increases in the future and you’ll know how much you’ll pay on your mortgage every month, regardless of market fluctuations.
4. You want to reduce the life of your loan
Refinancing a loan means getting a new loan with new terms. If you qualify, you can adjust aspects of your loan beyond the interest rate, such as the loan’s term or type (fixed versus adjustable).
If you decide to go with a shorter term, such as 15 years, you could save major money over the life of your mortgage. And while your monthly mortgage payment will likely increase if you shorten the loan term from 30 to 15 years, your interest savings could be substantial.
Another benefit of a shorter term mortgage? Often you’ll pay a lower interest rate for a 15-year mortgage than you will for a 30-year loan.
5. You’re contemplating a strategic refinance
Besides updating loan rates and terms, it may be possible to do a cash-out refinance.
But it’s important to remember that you’re tapping into the equity you’ve built into your home, so it’s not a decision to take lightly.
However, when used to lower your overall debt burden, cash-out refinancing may be a wise financial move. The cash from the refinance can be used to pay off debts with higher interest rates, such as credit cards.
Also, depending on the loan terms and other factors, a lower interest rate may allow you to repay your other debts more quickly.
6. Your finances have improved
A lender will often consider multiple factors when putting together an offer for a mortgage. Prevailing interest rates are one of them. Another factor is your financial situation, like your credit history, credit score, income, and debt-to-income ratio.
A better financial situation in your personal life will make you more creditworthy to the lender, potentially leading to better loan terms for you.
Therefore, if your financial situation has improved since you took out the original loan, especially when coupled with relatively low interest rates, it may be possible to refinance your mortgage loan into better terms.
7. You are nearing retirement
Those who still have years left on their mortgage when they enter their 60s should be aware that their monthly incomes may decrease when they retire.
What person wants to enter their golden years house poor?
Use current rates as a guide to determine whether refinancing makes sense before jumping into a refinance.
Remember that closing costs must be paid for every refinance, so you need to make sure a new mortgage makes financial sense.
8. You have a second mortgage with a variable rate
Most homeowners have a fixed rate first mortgage and a variable rate HELOC or home equity loan.
If interest rates are low enough, you could consolidate your loans into one fixed rate loan and have one monthly payment. This helps you avoid potentially paying a higher interest rate on your second mortgage should the variable rate go up.
9. You’re divorcing
A divorce decree may stipulate that one of you is liable for mortgage payments, but the lender is not required to honor that decree.
If it doesn’t, your spouse may remain liable for the loan. Refinancing the loan in your spouse’s name only is the only way to remove your name.
Refinancing a home mortgage is often a smart move. If you opt to refinance, be sure that the costs, such as fees, points, and closing costs, don’t exceed what you will save in monthly payments.
10. You’re planning to move
Finally, consider the length of time you’re staying in your home. Be sure that your “break-even” rate can be achieved before listing your home for sale, otherwise, hang on to the equity you’ve built in your home and take it with you when you make your next move.
Deciding whether or not you should refinance your home can be difficult, but when you let the facts help you make your decision, it can be easier to deal with the process that’s required to make it happen.