Buying a home means you are committing to a large financial investment over a long period of time. Since homes are expensive, most people purchase their homes by opening a home loan with a mortgage lender of their choosing.
Mortgages can have payback terms of up to 30 years, which is quite a long time, and there can be many changes in your life and the housing market over the course of paying back your home loan. As your financial situation changes and interest rates fluctuate, it could be a good idea to visit your home loan lender and discuss refinancing your loan to reduce your monthly payments or change the terms of your loan. How do you know if it’s a good time to refinance your home?
Our financial experts have put together a list of some of the good reasons homeowners refinance homes and when you may want to consider speaking with your lender to discuss refinancing.
What Does it Mean to Refinance a Home Loan?
When you refinance a home, you are essentially opening a new home loan to pay off your old home loan. This means you start over with new home loan terms but without the added pressure of having to pack your belongings and move. There are many financial benefits available to those who decide to refinance at the right time and for the right reasons.
The refinancing process typically takes one to two months to complete, though, it can take longer during times of lower interest rates, as the mortgage brokers become quite busy with refinancing requests. If you have a government-backed loan, such as an FHA or USDA loan, it can take even longer to complete the refinancing process.
When Is It a Good Time to Refinance?
You may be wondering if refinancing your home loan is a good idea for your particular situation. What are the potential benefits of refinancing, and do any of them apply to you?
Lower Interest Rates
Often, the ultimate goal of a home refinance is to lower your monthly payments. One way to do this is to open a new home loan with a lower interest rate when the interest rates drop. It’s always a good idea to keep an eye on the fluctuating interest rates for home loans. They actually change daily, but watch current interest rate trends. If the interest rates drop at least 0.75 percent below what you are currently paying for your home loan, it may be a good time to consider discussing the possibility of refinancing your home loan with your lender.
You can check current interest rates here. It is a good idea to check the current interest rates often so you can ensure you are not overpaying for your home loan.
Change Your Loan Terms
Another way to lower your monthly payments is to change the length of your loan. If you opened a 15-year loan, by changing the payoff timeframe to 30 years, you spread your payments out more, thus making your monthly payments much lower. Keep in mind that this option could result in paying more interest over the life of the loan, so ask your lender about the numbers.
While changing the term of your loan could lower your monthly payment, you can also opt for the reverse. Shortening the repayment period reduces the amount of interest you’ll pay over the life of the loan since you’ll pay the loan off sooner. If you can afford higher monthly payments, this can be a great option for saving money in the long run.
Switch From an Adjustable Interest Rate to a Fixed or Vice Versa
You can also change your loan from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa. Mortgage rates can be fixed, meaning they stay the same throughout the life of the loan, or adjustable, meaning they start at an introductory fixed rate but then adjust based on an economic index.
The interest rates during ARM intro periods tend to be lower than the comparable fixed rates, but when interest rates begin to fluctuate, they can increase quite a bit. By refinancing from an adjustable- to a fixed-rate loan at this point, you can avoid the spike.
On the other hand, if you started with a fixed-rate mortgage, refinancing to an ARM could mean a lower interest rate during the intro period. If you are considering moving from your home in the near future, and before the interest rate starts adjusting, this option could help you save money on interest in the interim.
Remove Private Mortgage Insurance (PMI)
Private mortgage insurance can be a significant added cost to your monthly payments. Mortgage lenders usually add PMI to home loans when the borrower is a higher financial risk and the lender needs added security. This is often the case if the down payment is under 20 percent. With PMI, if the borrower defaults on their monthly payments, the insurance will cover some of the loans and pay the lender back.
PMI is paid for by the borrower as a monthly insurance premium and added to their monthly home loan installments. If your home loan terms include private mortgage insurance, you can refinance to remove the PMI if you’ve built up 20 percent equity in your home.
Change in Credit Score
If you opened your home loan during a time when your credit score was lower and you have worked at improving your credit, you can refinance your home loan to harness your increased credit score and possibly get a new home loan with a lower interest rate. Typically, having a credit score of 760 or higher will allow you to get a better interest rate when refinancing your home loan.
Use Your Home’s Equity
If you have lived in your home for a while and need cash now, you can use your home’s equity by refinancing your home with a cash-out refinance. As long as your home will have at least 20 percent equity left after refinancing, you can borrow against your home’s equity by refinancing your loan and get cash back.
Opening a cash-out refinance loan allows you to also renegotiate the loan terms at the same time. If you aren’t looking to change your home loan terms by lowering your interest rate or changing the payoff timeframe, it could be easier to open a home equity loan instead, as closing costs due for refinancing a home loan can be costly.
If you think now might be a good time to refinance your home loan, contact the mortgage experts at Solarity Credit Union to discuss your options. You could be cashing in on the benefits of a home refinance in a matter of weeks.
