Lowering the interest rate is the primary reason most homeowners look to refinance a mortgage. A popular rule of thumb used to be refinancing when you could lower your rate by at least 1%. Today, it’s a bit more flexible and is more dependent on the total savings you will realize over the remaining life of the loan, as well as the cost involved in refinancing. There’s no one size fits all answer when it comes to refinancing. Calculating the costs and determining your breakeven period can help you determine if it’s the right choice for you. There are other considerations as well. Read on to learn more.
Reasons to refinance your mortgage
- Refinancing after your credit score improves. A better credit score may mean a better rate.
- Refinancing for a lower interest rate. When refinancing for a lower rate, always consider the cost involved in refinancing, as well as how long you plan on remaining in your current home.
- Refinancing an adjustable rate mortgage (ARM) into a fixed rate loan. ARM rates can go up anytime. You may want the stability of a fixed rate.
- Refinancing to lower monthly mortgage payments. A lower interest rate can mean a lower monthly payment.
- Refinancing to save on the overall interest you pay on your house in the long run. Your credit union mortgage lender can help you calculate the potential interest savings of mortgage refinancing.
- Refinancing to change your term. Refinancing to a lower rate and a lower term can save you even more. Some may choose to lengthen the term if they are struggling to make mortgage payments. While we don’t recommend this, if you can also lower your rate significantly it may work for you. Remember if your budget allows, lowering the term will enable you to pay off your mortgage loan faster and save a bundle on interest.
- Cash out refinancing. If you’re in need of cash and have equity built in your home, refinancing and taking a larger mortgage than the one you owe can help you get the cash you need. This might be a good option for a home remodel or education expense.
- Get rid of PMI. If you’ve built equity in your home, a refinance may enable you to remove private mortgage insurance. (PMI)
Shopping for a mortgage refi lender
While lowering your interest rate is always a goal, when shopping lenders, be sure to compare costs and fees as well. This might include a loan origination fee, appraisal fee, application fee, title insurance, and recording fees among others. There may also be some type of prepayment penalty to pay off your existing mortgage before it is due. That is another question for lenders when shopping around. As we mentioned above, when refinancing, you should always calculate the break-even point, or how long it will take you, figuring in the cost and any changes you made, to break even.
With today’s mortgage rates still at record lows, it might be an opportune time to refinance. A drop of just 1% in rate can put cash back in your pocket each month. If you can lower your rate and pay very little to do so, it’s almost always a good idea. Just to recap; consider how much you’ll save each month, how much you’ll save over the term of the loan, and how much you’ll pay in closing costs to refinance. Refinancing is not a good idea for those planning to move in a short period of time. A quick move might prevent you from reaching your breakeven point.
If you have a good reason to refinance, and it makes good financial sense, such as saving on overall interest, you’ll still need to qualify. Just because you have a mortgage now, doesn’t mean you’ll automatically qualify for another mortgage. A mortgage lender will look at the equity in your home, your income, your debts, and also your credit. Your refinance requires a new underwriting process, and the lender needs to determine that you are creditworthy. If you feel mortgage refinancing is the right option for you, click here to learn more about Guthrie Community Credit Union mortgage loans.