When Is Refinancing Worth It?
It’s a question most people with a mortgage have asked themselves. And the thought of it can excite you as much as it can keep you up at night. So, we’re here to help you get a better idea when it actually makes sense to refinance.
Before we get too far, let’s be very clear on what refinancing a mortgage is. In short, it’s when you replace your current mortgage with a new one. Your new mortgage will pay off your old mortgage, leaving you responsible for your new mortgage. The goal, of course, is that you save money.
That said, refinancing usually costs between 3% and 6% of a loan’s principal, plus you need an appraisal, title search, settlement costs, lender’s title insurance, underwriting expenses and application fees, just like you did when you took out your current mortgage. So, making sure it makes financial sense to proceed is key. Now, when should you consider refinancing?
1. When mortgage rates have decreased.
You may have heard that you should only refinance if the interest rate is at least two points lower than your current one. However, there are more things than that to consider. For instance, a 2% difference in interest rates is a lot more for a $750,000 house than a $75,000 house. That said, a lower interest rate is probably the best reason to refinance. It can help you build equity in your home and reduce your monthly payment or the term of your loan. Sometimes you can go from a 30-year mortgage to a 15-year mortgage with only a slight increase in your monthly payment.
2. If your home has gone up in value.
When your home goes up in value, you have the opportunity to take out a new mortgage that’s larger than your current one and “cash out” the difference. This gives you cash to pay down high-interest debt, make home improvements or large purchases, pay for college, go on vacation, etc. However, you have to be diligent in making sure you’re being responsible and not getting yourself into too much debt. Remember, you’ll still have to pay back that cash at some point.
3. If you want to go from an adjustable-rate to a fixed-rate mortgage.
Often, adjustable mortgage rates start out lower than fixed-rate mortgages. However, because they’re adjustable, you can wind up paying more than if you locked into a fixed-rate mortgage. When fixed interest rates drop, it may make sense to abandon your adjustable-rate for a fixed-rate mortgage so you don’t have to concern yourself with future rate increases.
4. If you have a better credit score.
Usually, the higher your credit score, the lower your interest rate. So, if your credit score has increased significantly, it’s definitely worth running the numbers.
5. If you want to pay points to get a better interest rate.
Paying points can result in a better interest rate. The money you'll save over the life of the mortgage loan may be substantial if you've paid up-front about 3% of the new loan total. Also, points may be deductible on your taxes as home mortgage costs if you itemize deductions on Form 1040. However, a lower interest rate also will reduce the interest amount you'll be able to deduct on your taxes.
Does now seem like a good time for you to consider refinancing?
If so, give one of our refinancing experts a call. They’d love to help you explore options and crunch the numbers. Use this list to find the one closest to you.
You may also want to check out our refinancing calculator. It’s no substitute for getting personalized professional advice, but it can be a handy and fun tool to try.
All loans subject to credit approval.
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