Refinancing your mortgage involves trading your current mortgage for a newer one to reap benefits such as a lower interest rate, lower monthly payments and a shorter payoff term.
Sounds good right?
However, refinancing isn’t beneficial for everyone. If you make the decision without considering your financial situation and goals, you could end up dealing with higher closing costs, higher monthly payments and a reduction on the equity in your home.
The most important thing to do before refinancing is to ensure that the cost of refinancing is less than the amount you’ll pay in closing costs and interest fees on your new loan.
If the interest fees and closing costs on your new mortgage exceed your current one, then refinancing may not be a wise decision.
You need to consider how many years you plan on staying in your current home. If you plan on moving before breaking even, then refinancing isn’t the best option.
Other factors to consider are your credit score (the higher the better), your debt-to-income ratio and your home equity.
Adjustable rate mortgages start with lower interest rates but they can rise over time resulting in an increase in your monthly payments.
Changing to a FRM for a lower interest rate that stays the same is a good idea when this happens. Alternatively, if ARM interest rates are low, converting to a fixed loan would help to lock in the interest rate.
On the other hand, when interest rates are falling, reap the benefit of paying lower interest rates and monthly payments by converting from a fixed loan to an ARM.
Many people choose to refinance to get a shorter loan term so that they can pay off their loan faster. The most common example is refinancing to a 15 year loan from a 30 year loan.
However, though you get a lower interest rate and a shorter pay off term, you’ll have to pay a higher monthly payment and a higher interest overall.
Alternatively, if you’re having trouble paying off your loan, you can refinance into a longer term loan which results in a lower monthly payment but a higher interest rate in the long run.
If you’re struggling with high interest debt, you can refinance your loan to lower your interest rates and eliminate your debt.
You can do this through a cash-out refinance which lets you use your home equity- which is the portion of your home that you own- to pay off your debts or cover any other expense.
You typically need at least 20% equity in your home to qualify for this kind of mortgage.
In general, refinancing makes sense when you’re going to stay in your home for a long time and when it will save you money.
Other situations include;
A general rule of thumb for refinancing is that you should consider it when you can reduce your current interest rate by at least 1%. This helps to increase the equity in your home and lower your monthly payments.
Mortgage repayments are the monthly payments made to repay a loan. It’s important to calculate it so that you can know how feasible refinancing your mortgage is.
You can do this using a mortgage calculator from loanDepot which makes the process of budgeting your costs convenient and easy unlike calculating your mortgage repayments by hand.