When Is the Best Time to Refi Your Home?
Refinancing, or refi for short, is the term for consolidating an existing mortgage loan in order to achieve lower rates and pay off the loan. The new loan offers multiple benefits, including lower rates and better terms. But there are things you should consider before you try to refinance.
Current Mortgage Rates
Current mortgage rates will have an impact on whether you should refinance and what kind of success you will have if you do. The current market will determine the types of rates you can obtain when you refinance. Studying the market and shopping around can tell you whether you should refinance now or wait until you can get better rates.
Benefits of Refinancing
Refinancing your mortgage loan goes beyond better rates. There are many benefits you can reap by refinancing. These include:
Saving Lots of Money
Refinancing can help you to save significant amounts of money on your mortgage, even up to thousands of dollars. This is due to the lower interest rates you could achieve. This frees up money for other debts, household expenses, education, or even a family vacation.
Lower Interest Rates
Most people refinance in order to take advantage of lower interest rates. It’s important to determine just how much you will save with the new rates.
Shorter Repayment Periods
You could achieve shorter repayment periods when you refinance. This usually happens when rates fall below certain thresholds. This can help you to repay your loan quicker without paying a higher monthly amount. However, this is only recommended for those who at the beginning of their term or about to start a new one.
Changing the Structure of Your Mortgage
If you are unhappy with the structure of your mortgage, refinancing could give you the option of changing it. For example, an adjustable mortgage involves a low rate at the beginning, but the rate rises and falls with the market. If you have been noticing higher rates lately, you may want to switch to a fixed-rate mortgage. Alternatively, you could switch from a fixed mortgage to an adjustable mortgage to take advantage of recent lower rates.
Tapping Into Your Equity
Refinancing could also allow you to tap into your home’s equity, freeing up money for other projects and expenses. You could use it to improve your home’s value, such as remodeling projects, home improvements, and home repairs. You could pay for education expenses, such as college tuition, which could lead to a higher-paying job. You could even use your home’s equity to help pay other debts, such as credit card bills, car payments and loans, student loans, personal loans, and so on.
Drawbacks of Refinancing
Every method of saving money has drawbacks to counter its benefits. The same is true of refinancing. The drawbacks of refinancing include:
The Rate Decrease May Not Be Worth It
Yes, you could get a lower rate. But sometimes the new, lower rate is not actually that much lower. And because there are additional costs associated with the new loan, you could actually end up spending more money than if you had simply stayed with your existing loan.
Additional Expenses Could Overwhelm You
There is more to refinancing than paperwork and a new low rate. There are other costs for the new loan. These include appraisals, processing fees, application fees, and origination fees. Make sure your rate is low enough that you can pay these costs without losing money. Otherwise, you risk drowning in the expenses and finding yourself unable to keep up with the payments.
Tapping Into Equity Could Bring Higher Costs
If you intend to tap into the equity of your home, be careful that you don’t incur more expenses. For example, if you obtain a personal loan to pay for education or home improvements, you will take on the costs, payments, and interest associated with that new loan. The same is true if you use such a loan to pay other debts, like credit cards. If you are not careful, you will end up accumulating even more debt.
You Could Risk Foreclosure
If you are using your home’s equity or the money you have saved to obtain new loans, you can incur new costs and interest rates. Even if this is not your intention, your new refinanced loan will carry its own expenses. This doesn’t just pile on more debts that you need to struggle with. It also puts your home at risk. If these extra costs are too much to handle, you may not be able to keep up with mortgage payments. This could lead to the lender foreclosing on your home.
How to Determine If You Should Refinance Your Mortgage Loan
You shouldn’t let yourself get drawn in by the benefits of refinancing. It’s not something you should rush into. Here are a few things you should consider before deciding to refinance your mortgage loan:
Examine Your Existing Mortgage
Take a look at your current mortgage. Examine all monthly payments, interest rates, and terms. Take into account how long it will take you to pay off the loan. Use this information to determine what you are hoping to achieve by refinancing – lower monthly payments, shorter repayment periods, or other benefits.
Find Out What You Qualify For
Next, shop around and find out what you actually qualify for. Also consider options that you could qualify for if you improve your credit score or increase your income. Make sure you consider all your options and shop for best rates.
Compare the Options With Your Existing Mortgage
Now you can compare your existing mortgage with the new options you have discovered. Look at how much you will save and whether you will meet the goals you have set for your finances.
Examine Your Budget
The next step is to see how the new loan will fit in with your household budget. Make sure to factor in initial costs, monthly payments, and how long it will take you to repay the loan.
Determine How to Meet Requirements
Once you settle on the best refinancing option for you, you’ll need to look at the requirements that you need to meet. Do you need to raise your credit score? Increase your income? Build savings for fees and other costs? Know the steps you need to take to meet these requirements and make a plan.