Refinancing. When Is The Right Time?
If you have a mortgage, you don't have to stick with the same terms forever. Refinancing your mortgage, or acquiring a new loan from a new lender with enough money to pay off your current mortgage, can be beneficial in certain circumstances. However, it can be difficult to know when to refinance, especially if you're happy with your current mortgage terms and fees.
To help you understand the refinancing process and determine when it may be a good idea, here's what you need to know.
What is Refinancing a Mortgage?
Refinancing your mortgage means taking out a new loan from a different lender that will be used to pay off your current mortgage balance. For example, if you have a $400,000 mortgage with an 8% interest rate from Lender A, you can apply for a new loan from Lender B with a 7% interest rate for the same amount. If approved, you'll use the funds from Lender B to pay off the balance of your mortgage from Lender A and continue making payments on the new loan from Lender B. This can result in lower interest payments as your new interest rate is lower than your original one.
Factors to Consider Before Refinancing Before refinancing your mortgage, you should consider three key factors that can impact your financial situation:
Closing Costs: Refinancing will come with closing costs, which can range from 2% to 6% of the loan amount. Make sure to discuss these costs with your lender or mortgage broker early on in the process.
Break-Even Point: You should also determine the break-even point, which is when the savings from a lower interest rate on your new loan exceeds the money you pay in closing costs. You can calculate this by dividing your closing costs by the monthly savings from each mortgage payment with the new loan.
Type of Refinance: Finally, consider whether you'll do a cash-out refinance or a rate and term refinance. A rate and term refinance involves exchanging your current loan with a new one for the same amount, typically with a lower interest rate, while a cash-out refinance allows you to withdraw some of your home's equity. Choose the option that best suits your goals and financial needs.
When is Refinancing Your Mortgage a Good Idea? There are several situations when refinancing your mortgage may be a smart move, such as:
Lower Interest Rate: If you think you can secure a lower interest rate, refinancing can result in lower interest payments.
Shorter Loan Term: If you want to pay off your mortgage faster, refinancing to a shorter loan term may be a good option.
Cash-Out Refinance: If you've built up significant equity in your home, a cash-out refinance allows you to access some of that equity and use it for things like home renovations or paying off high-interest debt.
In conclusion, refinancing your mortgage can be a great way to save on interest payments or access your home's equity, but it's important to weigh the costs and consider your financial goals before making a decision.