When Should You Refinance Your Mortgage?
Deciding to refinance your home can be a big decision for any homeowner. Whether you’re refinancing your home for a lower mortgage rate or personal reasons, you should feel confident in your financial decisions.
If you’re trying to decide when to refinance your mortgage, it’s important to first understand the refinancing process. We’ve put together a guide to help you understand when to refinance your mortgage and whether it’s the right financial option for you!
How a Refinance Works
When you first purchased a home, you borrowed money from a lender to pay the home seller. Now you’re making monthly loan payments to that lender to pay back the money that you borrowed.
When you refinance your mortgage, you take out a new loan. This new loan pays off the old loan and you’re left making payments on the new loan.
A cash-out refinance differs from a standard refinance by the process. This loan comes with a new mortgage that is typically a higher dollar amount than your past one. It will replace your existing mortgage loan with a new one complete with its own term, interest rate, and monthly payment.
When to Refinance a Mortgage
We’ve covered the basics of what a refinance is but you may be wondering why a refinance could be a good option. There are several reasons refinancing your home mortgage could make sense.
Reduce Your Interest and Monthly Payment
With a refinance, you can lower your current interest rate on the amount of money you owe. Refinancing your loan to a lower interest rate will in turn decrease your monthly payment. This means paying the bank less and putting more of your money going toward paying off your home.
Adjusting Loan Terms
If your concern is about the number of years on your current mortgage, refinancing to a shorter term may be the solution. Monthly payments with a shortened term may initially seem like a rate increase, but the years of payments over time will decrease.
While you may not see a payment reduction every month, the amount of interest paid is less and that ends up saving you money in the long run!
Be sure to bookmark our financial calculators as a helpful tool when comparing how your loan term can be affected by the expected monthly payment.
Getting Rid of Private Mortgage Insurance (PMI)
If you purchased your home with less than 20% of the home price for a downpayment, you’re most likely paying private mortgage insurance (PMI).
Refinancing can be a significant help for you to eliminate the extra expense if you’ve paid down your mortgage balance to 80% of the home’s original appraised value. You can also scrap PMI expenses if you’ve seen an increase in your home’s value to at least 20% equity.
Convert Your Adjustable Rate (ARM) to a Fixed Rate
An adjustable-rate mortgage (ARM) loan can help you ease into your payments, especially if you are a first-time homebuyer or if you’re looking for a lower payment amount at the beginning of your loan term.
However, If you plan on staying in your home for several years, you might want to consider refinancing to a long-term fixed-rate loan. Doing so can help you budget better since you’ll know your rate and payment will not change for the life of the loan.
Improved Credit Score
Your credit history plays a significant role in determining your credit score. If your credit score has seen a significant improvement from the time you took out the loan, you could qualify for a better rate.
When you refinance, a lender will take into consideration your credit score and history. If you are paying bills on time and in full, your credit score has probably increased. Keep a close eye on your credit history and take advantage of getting a free credit report before starting the refinance process.
Own Your Home Outright Faster
You could take advantage of the low rates in a refinance to reduce the term of your loan. Lower rates also come with shorter loan terms.
Keep in mind that switching from a 30-year to a 15-year loan will increase your monthly payment amount. But if you can afford it in the shorter term, you’ll save more money over the life of the loan. You’ll also build equity in your home faster.
Compare Your Refinance Options with NextMark Credit Union
Understanding the refinance process is helpful when deciding what type of mortgage loan is right for you.
Click below to compare loans and lenders alike. Here at NextMark Credit Union, you’ll get a community partner on your side every step of the home buying process!