The Right Time To Refinance Your Home Loan
When mortgage rates drop, you may want to take advantage with a home refinance. Perhaps money is tight, you want to lower your monthly payments or you're ready for home improvements. A refi may be the solution for freeing up capital and it can be a fiscally smart choice over the long-term.
Those who decide to refinance likely have clear financial goals on the horizon and plan to stay in their home for a while.
Most homeowners go down the path of a refi for lower interest rates (aka: a lower monthly mortgage payment). If extra monthly cash is your endgame, be sure your credit is up to par. The better your credit score, the lower your interest rate, the lower your monthly payment.
Others look to refinance to 'cash out' the equity on their home, which may cover:
- Looming debts
- Home improvement projects
- Extra cash for such things as higher education or holiday spending
After the financial crisis in 2008, refinancing became a viable option for those wanting to convert from an adjustable-rate mortgage (ARM) to a fixed-rate. Some are still in ARMs with rising variable rates, and a refi with a fixed-rate mortgage gives some peace of mind against future rate increases.
On a different end of the spectrum, some want to be debt-free and look to a refi to shorten the life of the loan. Refinancing from a 30-year to a 15-year mortgage term will knock out your loan in half the time, freeing up funds later in life for other important expenses, like college tuition or a larger retirement nest egg.
Refinance can also release capital to help with unpaid tax liens for homeowners nervous about potential garnishments or future tax filing.
While the sound of a refi may be appealing; tread carefully because those benefits don't come without a price.
Count the Cost
Before you start the refi process, be sure to speak with your mortgage lender to get a clear picture of how much the new loan will cost. Depending on your situation, there may be several fees to consider, including a refi application fee (which is non-refundable, even if the application is denied); an appraisal fee, and a loan originator fee — all of which can add up to 3% – 6% of the loan's principal.
That said, the cost of a refinance could outweigh its benefits, especially if you don't plan on staying in the home long. Find a trustworthy mortgage loan officer to learn about your options and to see if a refinance is the right move for you.