When To Refinance
Owning a home is a worthwhile investment that can help you build wealth and security over time. While some people can apply for a home mortgage on their own terms, many have to settle for less-than-ideal circumstances to get the home they truly want. This could be due to elevated national interest rates, low credit scores, or insufficient cash on hand to afford more than a minimal down payment. In these situations, it can still be worth taking steps to purchase a property that meets your unique needs and goals because, in the future, you may be able to refinance your mortgage. Understanding this process can help you decide if and when this strategy is right for you.
Reasons To Refinance Your Mortgage
There are many reasons to consider refinancing your mortgage, although the primary motivation for most homeowners is to save money. However, there are several ways to look at these short-term and long-term savings.
Make More Room in Your Monthly Budget
If your monthly mortgage payment is making it difficult to pay for other bills and necessities, refinancing could help lower this amount and create some much-needed room in your budget. Depending on what interest rates are available to you compared to your current mortgage rate, you could save hundreds of dollars each month.
Cash Out on Your Home's Value
If your home's value has increased since you purchased it or if you owe significantly less on your mortgage than what your home is worth, refinancing could allow you to collect that money. This difference is known as home equity, and cashing it out could give you access to the funds you need for major projects on your property.
Save More Money Long-Term
When you refinance at a lower interest rate or choose a loan with a shorter term, you could save yourself thousands of dollars in interest. In terms of investing, interest payments are funds that do not go towards the cost of your property but go directly to the lender instead. Refinancing could prevent you from throwing money away on fees and interest.
The Right Time To Refinance Your Mortgage
Refinancing has numerous advantages, but it isn't a process that should be rushed into. It's important to choose the right time so you can save the most money both immediately and down the road. If these scenarios apply to your situation, the timing may be right for you.
Mortgage Rates Are Low
The mortgage loan rate you qualify for will vary slightly based on your personal credit history. Even so, the number is still centered around national rates, which fluctuate on a daily basis. While they tend to follow somewhat predictable trends, there are situations that can lead to lower- or higher-than-normal percentages. The state of the housing market, inflation, and the overall economic status of the country all impact mortgage rates. When the numbers are low, it could be a sign that it's time to refinance.
You Have Available Funds for Closing Costs
Refinancing your mortgage can save you money, but it will still require some upfront costs. You will have to pay closing costs and fees on the new mortgage you're applying for, which typically costs homeowners anywhere between 2% and 6% of the overall value of the loan. If you don't have enough cash to cover this amount, start a savings plan to help you reach this goal.
You Need To Make Costly Home Improvements or Repairs
Even newer or well-built homes can have issues, and a serious problem with your home's structures or systems could have you looking at tens of thousands of dollars in expenses. In some situations, if you have enough equity, you could use this type of asset to help you make necessary repairs or updates to your home. Refinancing and cashing out on this surplus could help you get the money you need to maintain your home.
You Plan on Staying Put for a While
Because refinancing requires out-of-pocket payments, it can take a while for you to make back in savings what you spent on closing costs and fees. If you are planning on remaining in your home for several years and the timing is right, refinancing can be well worth the effort and money. However, if you are unsure how long you'll stay in your home or plan on selling in the near future, refinancing may not be worth it for you.
Preparing for the Refinance Process
Before you take the first step to refinance your mortgage, set yourself up for success by planning ahead with these tips.
Give Yourself Time
Refinancing is not an overnight transaction. Typically, it takes somewhere between one and two months to complete once you officially start the process. These timelines can vary from one lender to another, but be prepared to give yourself at least 45 days before your new mortgage payment amount kicks in.
Be Ready To Lock In an Interest Rate
If the national interest rates are good, you need to act fast. These rates fluctuate on a daily basis, and waiting just a few days can result in a significantly different final number. However, once you reach a certain point in the application process, your lender will lock in the current rate for a certain number of days. Even if it fluctuates before closing, you'll be guaranteed the agreed-upon rate.
Calculate Your Expenses and "Break-Even Point"
It's good to have a general idea of your expected financial obligations when it comes to refinancing. You can use a refinance calculator to help you estimate your expenses based on your home's value, the term length of the loan, current interest rates, and more. You should also calculate your "break-even point." This is the amount of time it will take for you to save what you spent on refinancing.
In the right circumstances, refinancing your mortgage can be very advantageous, saving you money right away and long term. However, timing is everything. FHA Insider can educate you on the ins and outs of refinancing so you can move forward with confidence. Contact us today to learn if now is the right time for you.