People get mortgages to make the dream of owning a home possible. Whatever the prevailing interest rate at the time, you took it, right? But with a changing economy, interest rates change. If today’s rates are lower than the rates at the time you got your mortgage, it would be a good thing if you could get a lower rate – your payments would be lower. The way to do that is to do is to refinance your mortgage.
Basically, a refinance allows borrowers to take out a new loan to replace the old one – at a new interest rate. Since you are, in essence, getting a whole new loan, you are required to go through the same steps you went through for the original mortgage. That includes a home appraisal and credit check. So, when is it a good idea to refinance your mortgage? Most likely it will fall into one of the following scenarios:
When you have owned your home for a long time
If you have owned your home for a long time, refinancing may be a smart option for you. Chances are good that you would lock in a lower interest rate. According to industry experts, if you can lower your rate by even 1% then it is typically worth the refinance. With lower rates, you will not only have the opportunity to save on monthly payments, but you have another beneficial option. You might be able to keep your monthly payment near the same, but reduce the overall loan term. Of course, this shift depends on how much interest rates have dropped since your initial mortgage. But it is a great option for those folks who are looking at life changes, such as retirement, in the relatively near future.
When your property value has increased
Whether it is because you just completed renovations on your home or you see an influx of consumers in the market, your property value will increase. The greater home equity you have, the lower your loan-to-value (LTV) ratio. (It represents the difference between the value of your property and what you owe.)
Similar to the way a borrower’s credit score is evaluated to determine the borrower’s mortgage rate, the loan-to-value ratio plays a part in that as well. When the LTV is low, the borrower is considered less risky for the lender, so they receive lower interest rates on their loan, which results in lower monthly payments. If your LTV has decreased, it may be a great time to refinance your mortgage.
When your credit score has increased
As noted before, your mortgage rate is highly dependent on your credit score. That means it could be a great time to refinance your mortgage if your score has recently improved. Homeowners will typically qualify for the lowest rates if their credit score is around 720. Consult with a lender to see if this is a good opportunity for you.
When the math makes sense
There are many additional costs associated with refinancing such as appraisal fees, lender fees, points and closing fees. It would be a good time to refinance your mortgage if the break-even point will come about rapidly. The break-even point refers to the amount of time it will take for monthly savings originating from the refinance to offset the cost of the refinance. If you qualify for a low-cost (or even no-cost) refinance then you will hit a break-even point relatively quickly.
With mortgage rates expected to continue increasing throughout 2019, it’s important for homeowners to consider refinancing sooner rather than later. For more information about when it is a smart decision to refinance your mortgage, or to learn more about home financing in general, contact me today.
Gary