WHEN IS THE RIGHT TIME TO REFINANCE?
By Jessica Hudson | September 1, 2019
Refinancing means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance: to obtain a lower interest rate, to get out of mortgage insurance, to shorten the term of their mortgage, to convert from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa; to tap into home equity to finance a large purchase, or to consolidate debt.
Mortgage rates have gone down.
Mortgage rates can fluctuate, as they're impacted by a variety of factors, including market movements, inflation, the economy and global factors. If mortgage rates fall, you may be able to save money by securing a lower interest rate than you have on your existing loan. This is known as a rate-term refinance.
Refinancing to an adjustable-rate mortgage might also make sense if you anticipate interest rates will continue to fall or you are planning to move in a few years. You are likely to get a better initial rate than a fixed-rate loan and you can select the initial fixed-rate period that best suits your situation.
When interest rates fall, you might also consider a shorter mortgage term. You might have the opportunity to refinance an existing loan for another loan that, without a huge change in monthly payment, has a significantly shorter term.
Your home has increased in value.
If the value of your home has gone up, you might also benefit from a rate-term refinance if you currently have mortgage insurance. You will need to have 20% equity in your home to get out of mortgage insurance. With some mortgage insurance rates as high as 1.9%, this will add up to quite a savings.
Your credit has improved.
Your credit score is a significant factor in determining your mortgage rate. Generally speaking, the higher your credit score is, the lower the interest rate you'll receive. If you know your credit was poor when you took out your initial mortgage and your credit has now improved, have you lender check your score and see what rate you qualify for now. If mortgage rates have also fallen, your rate could be significantly better.
Mortgage rates are going up and you currently have an adjustable-rate mortgage.
If mortgage rates are increasing and you currently have an ARM, you may want to consider refinancing and converting to a fixed-rate mortgage. That's because with an ARM, your rate may increase beyond what you would pay with a fixed-rate mortgage. If you're concerned over future interest rate hikes, a fixed-rate mortgage could provide some peace of mind.
To tap equity or consolidate debt.
If your home value has gone up or you have paid down the principal, you might have enough equity for a cash-out refinance. Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child's college education. Another common reason is to consolidate debt; replacing high-interest debt with a low-interest mortgage can make good financial sense.
Things to consider...
There are costs associated with refinancing that are important to weigh if you're thinking of refinancing (lender fees, title fees, and possibly an appraisal). On a rate-term refinance, your lender will be able to calculate the time it will take to recoup those costs. Usually if you can confidently say you intend to keep your home/mortgage for longer than the recoupment period, the refinance makes sense. You might also be able to do a "no-cost" refinance which means taking a higher rate (which would still be lower than your current rate in this scenario) to get your refinance fees covered. In this case, you would save money each month with a lower rate, and it would not cost you anything. Win-win. For a cash-out refinance, you need consider if the amount of money it is going to take to get cash (i.e. closing costs) is worth it.
Bottom line...
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of you loan, or helps you build equity more quickly. When used carefully, it can be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in this house? How much money will I save by refinancing?