Is Now The Right Time To Refinance?
BY: Cindy Mack
- Interest Rate: A lower interest rate is certainly a good thing when it comes to refinancing. But just how much lower does the rate need to be? The short answer is, it depends on the individual situation. A ½ percent drop in could make sense for someone that has a larger loan amount, but not for someone else with a smaller loan balance.
- Mortgage Insurance: If you took out your loan a couple of years ago and have mortgage insurance on it, a small drop in interest rate could translate to a significant reduction in your monthly payment. Often in refinancing, the lender will require a new appraisal. If your home’s value has increased to where you now have 20% equity, not only will you save money with the lower interest rate, but no longer having to pay mortgage insurance can really increase your savings.
- Other Debt: Have you taken out a home equity loan or maybe incurred some credit card debt? Refinancing your home mortgage will save you money on the mortgage loan. If you can also roll in other debt with higher interest, the benefit of refinancing increases.
- Future Expenses: When rates drop and you are considering a refinance, you should first think ahead about expenses on the horizon for which you may be falling short in saving. Do you have kids going to college? A wedding on the horizon? Home improvement projects? These are things that we often wait to pay for until the need is immediate, and for which we end up paying a higher interest rate.
- Your Mortgage Type: You may have taken out an adjustable rate mortgage (ARM) loan a few years ago, because the interest rate was lower than the fixed rates. Or maybe you didn't think that you'd end up holding on to your home for as long as you have and now plan to, because your circumstances have changed. In instances such as these, converting your ARM to a fixed-rate mortgage might be your best option, as fixed rates are often lower than ARM rates.
- Your Mortgage Term: When you originally took out your mortgage, you may have gone with a 30-year fixed option, to keep your payment as low as possible. Now, a few years later, your income has increased, and lower interest rates may mean you can not only reduce the interest you are paying, but also reduce the term. If you were to refinance to a 20- or 15-year term loan, your monthly payment might not really go down, but your overall savings on the loan definitely will.