You know that your home has value, and you know that you’ve been building equity. The hard part is knowing when it is a good time to refinance your mortgage. The desire to get a better deal and the hope of saving money may have you considering your options. But how do you know if the time is right to refinance your home? Start by asking yourself these questions:
- What is your goal? To lower payments, pay it off faster, or get cash out?
- How long will you stay in the home?
- What is your home's value in the current market?
- Could your credit score or credit history mean less favorable terms?
- How much lower is the new interest rate?
- Will you have to get private mortgage insurance (PMI)?
- Is your break-even point affected by hidden fees?
The Goal of Refinancing
Refinancing now can be a smart way to get out of debt sooner. You may be able to move from a 30-year to a 15-year mortgage. Or, lower monthly payments could allow you to pay down your principal faster. Make sure your loan agreement allows extra payments. On the other hand, if you were thinking of refinancing to afford a new sports car, take that trip to Tahiti, and pay off your credit cards so you can resume a shopping addiction – you may want to reconsider. Your property's equity is the money you’d have left if you sold it and cleared the debts, but once spent, that equity is gone.
Crunch the Numbers
You may not know what your house is worth before getting an appraisal, but there are ways to take an educated guess. Know your home's tax-assessed value, and keep tabs on the real estate market in your area to get an idea if market values are up or down. If you refinance more that 80% of the home’s appraised value, PMI will increase your costs.
Take an Interest
The old rule was to wait for an interest rate at least 1% lower. These days it’s more about the “break-even point.” Look at the closing costs; fees typically run between 3%–6% of the principal. Then look at how much money per month the lower interest rate will save. Use those numbers to calculate when the cost of refinancing equals the money saved. Keep in mind the difference between a fixed-rate and an adjustable rate. Your break-even point may move if your interest rate goes up.
It never hurts to ask more than one lender what they can offer. In fact, it often helps. If your credit score is good some lenders offer better terms. Do a bit of research. There are plenty of loan application apps and websites to help you quickly compare your options.
Timing is Key
If you can lower your interest rate by at least 37.5 points (0.375%) and your break-even point is 24 month or less, experts say refinancing is a good idea. If you sell before the break-even point you lose money; the suggestion assumes you plan to be in your home for at least five years.
If you have questions, contact a company like Republic State Mortgage Co for help. Every homeowner’s situation is different and although general trends are a good guide, the numbers need to make sense for your individual finances.