Since interest rates are higher than they were just a year ago, you may think now is a good time to refinance. Good question.
Purpose aYour existing mortgage loan is replaced with a new one. There are many here And it doesn’t just involve lowering your interest rate. It is also helpful for homeowners who want to let them go Changes in their loan tenure or other reasons.
Refinancing is not beneficial for everyone. It depends on your specific financial situation. If you believe you could benefit from a mortgage refinance, start by answering a few simple questions to see how much you could potentially save.
Here’s what you need to know to properly plan your mortgage refinancing.
When is the best time to refinance your mortgage?
There are no set rules for when you should refinance. It depends on your budget, plans and goals as a homeowner. Are you looking to lower your rate or payment? Do you want to pay off your debt faster? A mortgage refinance can allow you to do both.
Here are some guidelines for when refinancing might be smart:
- You can lower your interest rate by 1% or more by: check Freddie Mac’s weekly rate updates And compare those rates with your own. Most experts say refinancing is worth it if you can lower your rate by at least one percentage point. In some cases, a half-point can be beneficial — especially for large loan amounts (when even a fraction of a percent can make a big difference in long-term costs).
- You plan to stay home long enough to collect benefits: Calculate your breakeven point — or the month in which you’ll make your recovery . For example, if your refinance costs $5,000, and it saves you $150 per month, your breakeven point would be approximately 33 months (5,000/150). If you plan to stay in the home for at least another 33 months, refinancing is probably worth it.
- You need cash and probably spend it without it on a high-APR credit card: If you’re facing upcoming expenses that might otherwise go on a credit card, you might want to consider one Instead. Mortgage loans (including refinancing) have much lower interest rates than credit cards and other financial products, so this strategy can usually save you interest in the long run. Many homeowners use cash-out refinancing to consolidate their credit card and other debts—essentially rolling them into a single loan payment.
You can determine if mortgage refinancing makes sense for you by answering a few simple questions. Or use the table below to crunch the numbers.
If you want to refinance, consider doing so at the end of the month. This will reduce your closing costs as you only need to pre-pay for a few days. You might also consider refinancing toward the end of a quarter, when mortgage lenders are looking to meet quotas (and likely offer better deals for doing so).
When should you avoid refinancing your mortgage?
While refinancing your mortgage sounds good in theory, you need to make sure you’re a good candidate for one. In this case, time and the current state of your personal finances are important.
Here are some guidelines for when refinancing might not be the best idea:
- You just bought the house: It’s generally not wise to refinance right after you buy a home. That’s because you’re paying closing costs twice (which extends that breakeven point) and some lenders charge prepayment fees. They penalize you for paying off your mortgage too early.
- You cannot secure a lower interest rate: Refinancing can also be bad if you want to trade in a lower interest rate for a lot more. While there are situations when it may make sense, increasing your interest rate will only add to your monthly costs and increase your interest charges in the long run.
- You have a low credit score: You probably won’t want to refinance if you have a low credit score. A lower score usually equals a higher interest rate, which can reduce the savings a refinance can offer you. Generally speaking, mortgage lenders reserve their best interest rates for borrowers with scores above 740. However, there are ways .
If you’re not sure what rate you’ll qualify for, use an online tool to find out now.
There are 3 things to consider before refinancing
Before you consider a refinance, it’s important to remember a few things.
- Closing Cost: You must pay closing costs. Freddie Mac estimates these run around $5,000 per loan, but the exact total will depend on your lender, loan amount and location. You can roll these costs into your loan and pay them off over time, just remember: this will mean higher loan amounts, monthly payments and long-term interest costs.
- Credit Score: Refinancing can also hurt – At least temporarily. This is because your lender will perform a hard credit investigation when processing your application. This causes a temporary drop in your score (usually a maximum of five points). As long as you make your payments on time, though, the score should recover fairly quickly.
- Reverse mortgage: If a traditional mortgage refinance or cash-out refinance doesn’t sound like something you might benefit from, Also worth considering. A reverse mortgage allows homeowners (62 and older) who have paid off or paid off most of their mortgage in full, to take a portion of their home equity. The equity released, treated as tax-free income, can help pay off debt, pay bills or complete home repairs. However, it must be paid if the homeowner dies or elects to sell the home. Make sure you know Before proceeding. If you think you would benefit from a reverse mortgage, you can take the first step today by seeing what you qualify for.
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