When Should I Refinance My Mortgage?

For most homeowners, monthly mortgage payments probably make up the most considerable expense on their list of financial responsibilities. With mortgage rates potentially lowering, there’s an opportunity to lower those monthly payments by refinancing your mortgage.

What Determines Refinance Rates?

For borrowers with solid credit histories, refinancing can help you lock in a lower interest rate, which helps save you money on your monthly mortgage payments. Because of daily market fluctuations, your finance interest rate will depend on several factors:

• Your credit score
• The value of similar homes in your neighborhood
• The current appraised value of your home
• The lender you choose

Questions to Ask When Refinancing a Home

Refinancing your home isn’t as simple as comparing your current interest rate to the lower interest rate you may qualify for. You’ll need to ask yourself these questions to determine if refinancing makes financial sense.

Will You Save Money If You Refinance Your House?

Historically, the recommended difference between your current interest rate and the rate after refinancing should be at least 2%. However, even having a slightly lower interest rate can equate to massive savings over the term of the loan.

The interest rate is not the only factor you should consider. There will be fees like closing costs associated with the new loan. Some lenders allow you to roll over the closing costs into the balance of your refinanced loan. It’s important to know what your new monthly payments will be to determine if you’ll be saving money in the long run.

Do You Plan on Moving Soon?

If you plan to sell your home soon, then refinancing might not be right for you. Lowering your monthly payments may come with the risk of taking on additional fees like closing costs. For example, if closing costs are $7,000 and a refinanced interest rate saves you $150 / month, it would take you 45 months to recoup the costs before seeing the savings benefits.

How Long Have You Had Your Mortgage?

While gaining a lower interest rate can lower your monthly payments, refinancing also means extending your loan term since you’re taking on a new mortgage. And the new mortgage loan will be front-loaded with the new interest. For mortgages more than ten years old, it may be better to not refinance so you can pay off the loan sooner.

Do You Want to Change Your Loan Type?

For borrowers that have an adjustable-rate mortgage that’s approaching a change of terms, refinancing could be the right choice for you. Switching to a fixed-rate mortgage may save you money in the long run since the rate would no longer be variable, and the interest payments will not change over the loan’s lifetime.

This is also the case if you have an FHA loan that requires you to pay Private Mortgage Insurance (PMI). Refinancing can mean you’ll get off the original mortgage and get a new one that doesn’t add monthly PMI fees.

Are You in The Right Position to Refinance?

While assessing current marketing conditions is important, your financial health situation also needs to be considered before refinancing. Here are some indicators that refinancing could be beneficial:

• You’ve built a good amount of equity in your home
• You have enough equity to get rid of mortgage insurance
• You can tap into your home’s equity with a cash-out refinance

Refinancing Your Mortgage

If you can lower your interest rate or if the value of your home has increased, it’s time to consider refinancing your current mortgage. Community First Credit Union has a team of Home Mortgage Advisors to guide you every step of the way once you schedule an appointment.