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When to refinance

Category: mortgage-fundamentals
When to refinance

Refinancing your home is a big decision with a lot of variables in play. Often times, homeowners think they should just be refinancing when rates are lower than their current loan rate. Although that’s true, there are a variety of other reasons and considerations that should take place in order to make a financially healthy decision. It's more than just getting a lower mortgage rate. You want to consider how long you plan to stay in your home and calculate your refi break-even point.

When does it make sense to refinance?

Some good reasons to refinance include:

  • The current mortgage rates are below your current loan rate.
  • You would like to pay off the loan quicker with a shorter term.
  • You've gained enough equity in your home to refinance into a loan without mortgage insurance.
  • You’re looking for some short-term cash which can be accomplished by leveraging your home equity for a cash-out refinance.

What is a “good” mortgage rate?

Mortgage refinance rates often change rapidly, and may even change throughout the day, so it’s important to avoid focusing too much on a low mortgage rate that you read about or see advertised. A mortgage refinance rate is primarily based on credit score, and equity in the home. If you have a good credit score and proof of steady income, you are more likely to get a competitive rate.

On the other hand, hitting a rough financial patch, missing payments, or taking out loans for a car or schooling can do a number on your credit, and that affects your ability to qualify for a refinance loan and get a good rate. Before refinancing, you might want to do some credit repair to make sure you get a competitive rate.

Credit repair includes waiting to apply for a refinance until after reducing some debt, and allowing your credit history to heal over time with a period of prompt payments.

How low should rates be compared to your current rate in order to consider a refinance?

You may have heard that interest rates should be 1% or more below your current rate in order to consider refinancing. However, this generalization may not be for everyone. Sometimes, a half-point improvement on your rate might make sense for you.

Running your numbers through a mortgage refinance calculator often helps you to decide whether it’s time to refinance.

Will the savings be enough to make refinancing worthwhile?

When considering refinancing your home, it’s important to think about the costs associated. Closing costs typically range from 2% to 5% of the loan amount. Often there will be an appraisal, a credit check, and/or origination fees as well. Additionally, it’s important to check if the loan you are paying off has a penalty for paying off early.

With all that in mind, it’s important to figure to figure out your “break-even point” or out how long it would take for your monthly savings to recoup all of the costs of a refinance. For example, say that you are saving $100 a month on your payments, but the closing costs are $5,000. It would take 50 months to recoup that cost.

Your breakeven point is important to note because in the above example, if you move within the 50 months it takes to recoup the cost, you’ll lose money on your refinance. Because of this, in addition to taking note of your breakeven point, it’s important to assess whether your home fits your future lifestyle. If you’re thinking about starting a family, or selling in the coming months, you may not stay in your home long enough to break even on the costs.

When should you reconsider a refinance?

If you have already paid off a significant amount of principal, it’s important to think carefully before jumping into a refinance. If you’re already 10 or more years into your loan, refinancing to a new 30 or even 15-year loan may lower you rate considerably, but add significant interest costs. Because the beginning of every mortgage is used to pay the interest of the loan, the longer you’ve been paying your mortgage, the more of each payment goes toward the principal instead of interest.

Consider instead asking your lender to run the numbers on a loan term equal to the number of years you have remaining on your current mortgage. This may help you to reduce your mortgage rate, lower your payment and save a great deal of interest by not extending your loan term.

Should I consider an adjustable or fixed refinance?

With this consideration, it’s also important to assess how long you plan to stay in your current home. Generally, if you plan to stay in your home long-term, you may want to consider a fixed rate loan. If you are considering moving in a few years, you may want to consider an adjustable rate mortgage. Here’s why:

Let's say your current mortgage is an adjustable-rate mortgage (which means that the rate fluctuates throughout the term of your mortgage on a set schedule), and you are nearing the initial term of five years at 3%. At the end of the term, the adjustable rate can reset and move higher. If you plan to stay in your home for several more years, you might benefit from refinancing to a fixed rate mortgage, so your interest rate won’t fluctuate.

Alternatively, if you are considering moving in a few years, refinancing to an adjustable-rate-mortgage for a longer term might help you save some money because lenders usually offer lower interest rates for adjustable-rate mortgages!

Ready to consider refinancing?

Talking about your options with a member of your dedicated loan team can help you make the best decision for your situation. Homepoint homeowners can start the conversation by calling us at (833) 773-6489.

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