Is Refinancing Your Home Loan the Right Move for You?
Many economists and mortgage lenders expect rates to “slope downward” through the end of the year and this can have homeowners wondering if it makes sense for them to refinance.
Refinancing your home loan can be a great way to save money, reduce your monthly payments, or pay off your mortgage sooner. However, it’s not always the right decision for everyone. Before jumping into a refinance, it's crucial to evaluate whether it makes financial sense for you.
Here are key factors to consider when deciding whether to refinance your home loan:
1. Compare Your Current Interest Rate to New Rates
One of the main reasons homeowners refinance is to secure a lower interest rate. A good rule of thumb is that refinancing makes sense if you can reduce your interest rate by at least 0.5% to 1%.
To see if refinancing will benefit you, start by comparing your current mortgage rate to the rates being offered today. A lower interest rate can lead to significant savings both on your monthly payment and over the life of your loan. Use a mortgage calculator to get a sense of how much you could save with a new rate.
2. Calculate Your Break-Even Point
Refinancing isn't free. There are typically closing costs associated with the process, including appraisal fees, application fees, and title insurance, among others. To decide if refinancing is worthwhile, you need to calculate your break-even point—the point at which the savings from your lower monthly payment will cover the cost of refinancing.
To find your break-even point, divide the total cost of refinancing by the amount you’ll save each month with your new rate. This will give you the number of months it will take to recoup your refinancing costs. If you plan to stay in your home longer than this break-even period, refinancing could be a good financial decision.
3. Consider the Loan Term
When refinancing, you have the option to change the term of your loan. Switching from a 30-year mortgage to a 15-year mortgage can save you a substantial amount in interest over the life of the loan, even if your monthly payments increase. On the other hand, extending your loan term can lower your monthly payments, but you may end up paying more in interest in the long run.
Think about your financial goals and whether you prefer lower monthly payments or paying off your mortgage sooner.
4. Evaluate Your Home Equity
Lenders typically require a certain amount of equity in your home to qualify for refinancing, usually around 20% or more. If your home has increased in value since you bought it, or if you’ve paid down a significant portion of your mortgage, you may have enough equity to refinance.
Higher equity can also help you qualify for better interest rates and potentially avoid private mortgage insurance (PMI), which can save you even more money.
5. Check Your Credit Score
Your credit score plays a significant role in determining the interest rate you’ll qualify for when refinancing. A higher credit score can help you secure a lower rate, which translates into more savings. Before applying for a refinance, check your credit score and take steps to improve it if necessary, such as paying down debt or correcting any errors on your credit report.
7. Reflect on Your Financial Goals
Consider your long-term financial goals and how they align with refinancing.
Are you planning to stay in your home for many years, or do you anticipate moving soon? If you're planning to sell in the near future, the upfront costs of refinancing may not be worth it.
How to Decide if Refinancing Makes Sense for You
To determine if refinancing your home loan is the right move:
Review Your Current Mortgage Terms: Understand your current interest rate, remaining loan balance, and loan term.
Get Quotes for New Loans: Shop around for quotes from different lenders to see what rates and terms you qualify for.
Calculate Your Break-Even Point and Potential Savings: Use an online refinance calculator to determine how long it will take to break even on the costs of refinancing and how much you could save in total.
Think About Your Future Plans: Consider how long you plan to stay in your home and your overall financial situation.
Talk with Your Advisor: If you’re unsure whether refinancing makes sense for you, reach out and we can help you weigh the pros and cons based on your unique circumstances.
Refinancing can be a smart financial move, but it's not right for everyone. By carefully considering the factors outlined in this guide, you can make an informed decision about whether refinancing your home loan is the best choice for your financial future.