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Key takeaways:
- While it’s tempting to put your mortgage on autopilot, smart homeowners keep track of opportunities to save by refinancing.
- Three situations call for you to consider a refinance: you have a legitimate reason, you’ll improve your mortgage terms, and you’ll quickly cover your closing costs with the savings.
- Refinancing can add costly private mortgage insurance to your monthly payment, so be careful when considering a cash-out refinance.
While it would be easy to just put your mortgage in ‘set it and forget it’ mode, smart homeowners always keep their eye on the refinancing horizon—it could help you save money or pay off your mortgage faster.
3 Signs you should consider refinancing your mortgage
1. You have a solid reason for refinancing
Sure, a refinance may allow you to lower your interest rate, but how much makes the refinance worthwhile? The rule of thumb is that you need to lower your interest rate by at least 0.5% and keep the new loan at least two years, though there may be exceptions.
Another goal could be that you want to shorten your payoff period and pay off your mortgage more quickly. If interest rates have dropped, you may be able to move from a 30-year to a 15- or 20-year fixed-rate mortgage for just a small change in your monthly payment. Doing so allows you to pay off your loan faster, pay less in overall interest, and build equity in your home more quickly.
You may be interested in doing a cash-out refinance to pay for a big remodel, pay off high-interest loans, or cover unexpected medical expenses. But there are risks in continually tapping into your home's equity. A Global Credit Union Home Loans specialist can help you work out whether a cash-out refinance is a smart move for your situation.
2. Your overall mortgage terms will improve
Sometimes the answer is straightforward. A move to a lower interest rate will help you pay less each month. A shorter-term loan allows you to pay off your mortgage more quickly. You plan to sell your home before the interest on an adjustable-rate mortgage (ARM) is scheduled to change, allowing you to save money now.
While it may sound odd, sometimes moving to a mortgage with a higher interest rate can save money in the long run. For example, if you have an ARM that will adjust soon, you may consider shifting to a fixed-rate loan where the locked-in rate is higher than your current interest but lower than the ARM’s anticipated future rate.
Do you now qualify for a different type of mortgage? If you had a conventional loan but now qualify for a VA or FHA loan, you might save money by refinancing. And, if your credit has improved since you obtained your original mortgage, you may qualify for a better interest rate.
3. You will break even with closing costs in a reasonable amount of time
It costs money to refinance your mortgage, so make sure the investment is worthwhile. Closing costs include an appraisal, title insurance, and other fees, and can total thousands of dollars.
Take time to calculate your break-even point. If your closing costs will total $3,600 and you’ll save $150 each month in payments, it will take two years before you actually begin saving money by refinancing. Make sure you plan to keep your home long enough to pass that point.
While there are refinance options with no closing costs, these typically carry a higher interest rate or have a larger required principal. This option may make sense, depending on how long you intend to keep the house.
Did you know?
If your goal is to pay off your loan more quickly, consider just paying extra on your mortgage each month as an alternative to a refinance. There are no closing costs involved, and the interest you save over the term of the loan will add up quickly.
If you refinance and your new mortgage totals 80% or more of the value of your home, your lender may require you to add private mortgage insurance (PMI). PMI can be costly, so do what you can to avoid a cash-out refinance that adds PMI back to your payment.
