Spotlight

When is it a good time to refinance your mortgage?

If mortgage rates are low, is it a good time to refinance? Not necessarily.

Deciding to refinance depends on a variety of factors including – but not limited to – interest rate. Common reasons to refinance include:

• - Significantly lower interest rate
• - Use savings to contribute more to retirement or other savings
• - Cash out equity for another major purchase, such as a vehicle or child’s education
• - Cash out equity for home renovations that would be otherwise unaffordable

The following three questions can help homeowners decide whether or not it is a good idea to refinance.

1. What are the potential savings from refinancing?

   Refinancing can save homeowners money in two ways: by reducing their monthly mortgage payment, or by saving on interest over the life of the loan.

   In an ideal world, refinancing saves homeowners money in both ways. However, this is not always the case. For example, a family that has 25 years left on a 30-year mortgage refinances at a lower rate, the monthly payment may be lower but they may pay more interest in the long run; this is because the length of the loan is now a total of 35 years. If the same family has 25 years left and refinances into a 15-year mortgage, their monthly payment may go up slightly but they would save tens of thousands in interest over the life of the loan.

2. How long do you plan on staying in your home?

   After refinancing, it can take homeowners several months – or years – to begin seeing savings. If you plan on staying for several more years, refinancing is a good option; if you plan on moving sooner rather than later, refinancing may not be the best idea. A loan officer or mortgage broker can help homeowners determine when they can break even after refinancing

3. Does your home qualify to refinance?

   Not every homeowner is qualified to refinance. Being able to refinance a home depends on a variety of factors, including:

   - Income

   - Equity in the home

   - Credit

   Just like when applying for an initial mortgage, lenders want to ensure homeowners can continue to afford the monthly payments after refinancing. Significant changes to credit or income, being underwater on the current mortgage, or a lack of equity can all prevent homeowners from qualifying for refinancing.

Refinancing is not the right option for every homeowner. While lower interest rates may be alluring, it may not be the right choice for your family and situation. Taking the time to evaluate total costs, calculate monthly payments, and think about your long-term plans can help homeowners decide if refinancing is the right choice.

by Author, December. 010, 2019