In certain situations, it could make sense for you to refinance your home. Let’s take a look at when and why you should do that.
Stay Up-to-date with Mortgage Rates
While low mortgage rates should not be the reason you decide to refinance your home, it’s still best to refinance when the rates are low.
Mortgage rates fluctuate every day, so if you’re planning on refinancing, it’s a good idea to keep an eye on the latest mortgage interest rates so you can refinance at the best time.
In general, rates are near rock bottom at the moment.
So, if you’ve been considering refinancing your home, now could be the ideal time.
To get a good refinance rate, you’ll also need a good steady income and credit score, as your particular rate will often be based on those things.
Refinance to Shorten Your Loan’s Term
When interest rates are low, you could refinance an existing mortgage loan for another that will significantly make the term of your loan shorter without affecting your monthly payment too much.
For example, let’s say you have a thirty-year fixed-rate mortgage on a $100,0000 property.
If you were able to refinance from 9% to 5.5%, you could cut down the length of the loan’s term by half with a monthly payment of only $817 rather than $805.
That’s got to make sense!
Do some calculations to see how much you could lower your loan’s term and how much extra you would have to pay each month.
Refinance to Get a Lower Interest Rate
If you want to secure a lower interest rate on your existing loan, you should consider refinancing your home.
Generally, it’s recommended that you should refinance if you can reduce the rate by at least 2%, but you could also consider refinancing at 1%.
Not only will reducing your interest rate help you to save money.
It will also help you to increase the rate at which you build equity in your property.
Refinance to Convert from One Type of Mortgage to Another
Sometimes, homeowners refinance to convert from an adjustable-rate mortgage to a fixed-rate mortgage or from a fixed-rate mortgage to an adjustable-rate mortgage.
Adjustable-rate mortgages often begin offering lower rates than fixed-rate mortgages.
However, adjustments over time can cause rate increases that make the rate higher than a fixed-rate mortgage.
In that situation, switching from an adjustable-rate mortgage to a fixed-rate mortgage can create a lower interest rate and ensure there are no future hikes in interest rates.
On the other hand, switching from a fixed-rate loan to an adjustable-rate loan, which often has lower monthly payments, can be a good financial strategy if interest rates are dropping.
In that case, you could reduce your mortgage loan’s interest rate and monthly payment while not having to worry about how high rates will be in decades to come.
Refinance to Tap Equity
You can access the equity in your home if you need to cover major expenses, such as paying for your kid’s education or remodeling your home.
However, refinancing to tap equity increases the number of years of your mortgage loan, so you should only go down this route when you have no other options.
You could also refinance to consolidate your debts, but you should only do that if you can resist the temptation to spend after the refinancing has allowed you to get out of debt, otherwise you’ll soon get into more debt.
Another reason for tapping equity via refinancing is when serious financial emergencies arrive.
If you’re refinancing because of that, make sure you explore all of your options before taking that step.
At the end of the day, refinancing your home can be a good option. Just make sure you do it at the right time and for the right reasons.