When to Refinance Your Mortgage

Lower payments? Less interest? Paying off your house faster? Refinancing your mortgage loan can help you achieve a number of different goals. With interest rates at historic lows, you can hear a country-wide chorus of people asking, “Should I refinance my home?” and “Is it worth it to refinance?” 

If you’re trying to decide whether you should refinance, there are helpful tips and resources that can assist you with the decision-making process. If the time is right, you could save a ton of money on your monthly payments and your total interest costs on your loan.

When it’s a good time to refinance your mortgage

Figuring out when to refinance can seem like a puzzle if this is the first time you’ve considered it. Luckily, there are a lot of factors you can weigh to decide if the time is right. These factors include the current interest rates, your credit score, the value of your home, your financial profile, your financial goals and the current economic climate. If a few of these factors are more favorable than when you initially bought your home, refinancing could be a great move.

Situations where refinancing makes sense include:

  • Your credit score or financial profile has dramatically improved.
  • Mortgage interest rates have dropped significantly from when you purchased your home.
  • You want to cash in on some of the equity you’ve built up in your home.
  • You need to find a way to lower your monthly payments.

So, how does refinancing work?

Refinancing is a fancy financial term that just means taking out a new loan to pay off your old loan. By doing this, you may be able to lower your monthly payments or save significantly on your total interest costs over the life of the loan.

Additionally, you have the opportunity to change the type of loan you have. Refinancing options available are similar to those with a new home purchase and include options like fixed-rate loans, adjustable-rate mortgage (ARM) loans, cash-out refinance loans, rate-and-term loans, VA loans, USDA loans and cash-out refinance loans.

Determining when you should refi starts with a look at your financial goals, the type of loan you’re looking for, your financial situation and the current market climate.

What is a cash-out mortgage refinance?

One option that’s available for you when refinancing is a cash-out mortgage refinance. With this option, you’re able to “cash-out” some of the equity that you have built up in your home. Remember, your equity is the difference between the value of your home and what you still owe on your loan.

The pros of this option are that you can get access to a large sum of cash quickly, and you can take out some of your equity without the need to sell your home. The cons of a cash-out refinance are that it increases your debt obligation, may breed bad spending habits and could reintroduce the need for private mortgage insurance (PMI), depending on how much you cash out.

You shouldn’t move forward with a cash-out refinance unless you have a good reason for needing the money and have discussed the pros and cons with a financial professional.

How to calculate your break-even point for closing

Because you still have to pay closing costs when you refinance your mortgage, it will take some time before you break even on your financial move. The point at which you’ll save enough on your monthly payments to make up for the closing cost expense is known as the break-even point.

If you’re planning on selling your home before the break-even point, you’ll end up losing money on your refi. Using a break-even calculator can help you determine when you’ll start to see savings from your refinance.  It can also help you to decide if refinancing is the right option.

How long is the process of refinancing?

The exact time it takes for your refinance to close depends on the mortgage company you choose to work with. According to Rocket Mortgage, the average closing time on a refinance is around 30 to 45 days.

The exact time depends on a lot of factors that may be out of your control, like appraisals and inspections. There are a lot of other parties involved in the process, and you may find yourself at the mercy of other people during the mortgage process.

The speed of the process has slightly increased over the years thanks to the electronic submission of documents through mobile and web applications. However, many of the processes involved still take place offline.

Is now a good time to refinance your home?

With interest rates at historic lows, an opportunity may exist for you to benefit from a refi. Refinancing can help to lower your monthly payments, gain more favorable repayment terms and save on your overall interest costs.

Take note that even a small percentage change on your interest rate can mean massive savings over the life of your loan. If you keep your payments the same amount, you may be able to shorten how long it takes you to fully pay off your home.

COVID effect on mortgages

In response to the economic downturn, the Federal Reserve lowered interest rates to try and jumpstart the economy. The initial effect was a dramatic drop in mortgage rates. People flocked to banks and lenders to refinance and take advantage of the opportunity.

Because of the dramatic increase in demand, mortgage rates shot back up. Thankfully, this increase only held for a short while, and rates have since dropped back down toward the historic lows. The Fed currently projects no increases in prime rates (which drive changes in mortgage rates) through at least 2022, which means the opportunity to look into refinancing still exists.  

Currently, the national average is 2.96% for a 30-year fixed-rate mortgage loan and 2.46% for a 15-year fixed-rate loan. 

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