Mortgage refinancing can enable you to lock into lower interest rates or adjust the type of mortgage you currently have, or borrow against the equity in your home. However, it also has closing costs so you have to determine whether and when refinancing is more beneficial to your situation. Below are some of the aspects that may help you identify the right time to consider refinancing your home loan.
Compare Interest Rates
The primary reason why most people opt for the refinancing of their home loan is in a bid to obtain a lower rate of interest on their loan. The difference in interest rate between two companies can be as little as 1% so that alone could save you thousands of dollars over the life of your mortgage. There is a rule of thumb that should be followed, and that is if you can reduce your current interest rate by one percent then you should consider refinancing. This can make refinancing worth the up front costs.
This involves a comparison of the current interest rate with the existing market rates. This means that the interest rates change over time hence the need to analyze them over a given period. It is quite common to find average 30-year fixed mortgage rates posted on most of the financial websites. You can use these to check if rates are 1 point lower than what you presently have. Reduced interest rates are mostly the reason why homeowners opt to refinance.
Evaluate Closing Costs
Refinancing fees, called closing costs, can come to thousands of dollars because of points, appraisal, attorney and many others. However, it is advisable to seek an estimate of the total costs from your lender before proceeding. Then calculate your breakeven point which refers to the amount of time that it takes before the amount of money saved each month through refinancing equals the amount of money you have to spend on the closing costs.
For instance, if you incur five thousand dollars in closing costs but gain two hundred dollars in monthly savings from the new home loan, it will take you twenty-five months to get your money back. This provides you with a window period within which you can hope to recover the initial capital that you put in. It is always important to know your breakeven point so that you can be able to determine if refinancing now is wise or if you should wait.
Determine whether you will be a short-term or a long-term user of PrEP
But to get the maximum benefits from refinancing, you should have time. The longer you remain in the home after the refinancing, the more interest money you save due to the lower rate. The majority of financial advisors suggest refinancing to be done only if the borrower’s intention is to live in the property for several more years.
Moreover, learn whether the new loan attracts prepayment charges in the event that you wish to sell or relocate earlier than planned. Refinancing makes sense if you are confident that you will remain in the property for a long enough period of time to recover the cost of the closing and earn ongoing interest savings.
Use Cash-Out for Other Goals
Cash-out refinancing is another way of utilizing the equity you hold in the home for other financial objectives. In this kind of refinance, you borrow more than the balance outstanding and receive the extra amount in cash. These funds are typically used to pay off credit cards with a higher interest rate, make home improvements to increase the value of the home, save for retirement, or pay for large expenses.
If you have large amount of equity to tap, speak to a lender and compare the costs of cash-out refinance to other options, such as home-equity loans or HELOC. However the additional funds come with additional costs so ensure that you are able to determine whether it is the most efficient way of using the equity to meet your current financial goals.
Get a Lower Monthly Payment
As with any loan, there is progress in time and as the amount of money paid towards the mortgage decreases the options present themselves to refinance with a lower monthly payment. It can help improve cash flow and provide a little more breathing room financially. To enjoy low payment then you require having at least twenty percent equity that is available in the property.
Consult with your lender to perform the calculations on the feasibility of giving up your current payment for a new payment that comes with refinancing of the loan. Sometimes, you can move to a longer repaying term such as from a thirty-year to another thirty-year in order to get lower payments. Or, to pay less in interests over the entire period of the loan, the term is often shortened. Decide in terms of the time you plan to spend in the home when choosing the type and style of furniture to purchase.
Change Loan Term
In addition to lower interested rates and payments, refinancing enables you to change your loan repayment period if that is convenient. For instance, converting a thirty-year mortgage to a twenty-year one means that repayment time is cut short and the total amount of interest to be paid over a long period is reduced as well, not to mention the fact that one builds equity faster. Or you may wish to stagger your payments making them smaller in value but more in number with a high total interest rate.
Consider what loan term is reasonable in the current situation and how many years one is likely to live in the house. Perform calculations based on interest cost, equity increase, and other factors for the different terms. This is because refinancing can assist in aligning the loan to your current needs and concerns as you go through the years of owning the home.
Tap Home Equity Tax-Free
Home equity loans or lines of credit are means of borrowing on the equity in your home but any withdrawal is considered income. Another option is to opt for cash out refinance. This money can be used for any purpose, but unlike other options, it is tax-exempt up to one hundred thousand dollars if spent on home improvements.
Thus, if you require funds from your home equity for a remodel or fix, this strategy enables you to obtain money tax-free. Discuss with the lender and your preferred tax advisor to know more about the requirements and the eligibility for the program. To the right homeowner, this benefit in addition to a lower interest rate, can be a perfect economic solution.
Weigh Retirement Goals
It concerns when you retire your home which determines the retirement time and how much you have saved. Some of the things that one should consider when making the decision include; age, income stability, years to retire and others. Plug in the numbers to determine whether the more distant possible future savings from refinancing now are greater than the possible savings or gains from paying off the mortgage early.
Also, engage your financial advisor to demonstrate how specific refi solutions facilitate or hamper your chances of retiring. Reflect about your current and future needs and goals as they concern your home ownership. The home loan decision you make today can have implications in the future, for instance when you will be planning to buy your next home.
But before going to any other lender, ensure that you talk to your current lender first.
So, before scouting new lenders and going through the necessary forms for a loan application, it is best to consult with your current lender. Whether they should try to meet the offer of a competitor or offer something better. Payments history, home value assessments and other documents related to your loan are easily accessible for established lenders hence the process is easier and does not waste much of your time.
Moreover, as most existing clients refinance at a higher rate, certain banks provide special rebates for buyers who come back. Spend ten minutes on the rates and closing estimates. And if your current lender cannot offer better rate than another lender then proceed with shopping competitors. However, when extending right of first refusal to your lender, it means that you get to score perks and convenience.
The decision to refinance entails the consideration of several aspects including the time frame to the retirement age, the amount of home equity, the financial plan among others. Do the maths for your case. If it pencils out well, that is, if the preliminary plan looks like it will work out well when put into action, then go ahead. However, do not run to refinance your mortgage without careful consideration. Understand the key factors so that when it is time to refinance, the timing is right for you and for the present and in the future!
