When Should You Refinance Your Mortgage?
Having a mortgage eventually leads to the inevitable question, “When should I refinance my mortgage?” The good news is that you don’t have to refinance your mortgage ever, as long as you like the terms and your payment is doable. However, there are certain situations that are pretty good reasons to go through the process.
Is Refinancing Expensive?
No matter how easy your mortgage refinance is, you should keep in mind that it will cost you something. Those costs may be folded into your refinance if you have the equity, or you may have to bring a check to closing, but before you jump in with both feet, make sure that the price you’re going to pay for the refinance is worth it.
The cost of a refinance can vary widely, depending on the program you’re using, the type of bank that’s doing the financing and whether or not it’s a streamline refinance, so it’s a good idea to get the actual cost information from your future lender. If you’re not that far along, a very rough estimate you can use for now would be about three percent of the balance you intend to refinance (for example, if you owe $150,000, but you want to cash out a little equity and borrow $200,000, you’d figure it on $200,000).
Divide that figure by the number of months you intend to continue paying your mortgage and add that number to the new mortgage payment. In the above example, if you’re staying five more years, at three percent, it’s an extra $100 a month. If you see a small savings, then you’re already ahead of the game.
Examples of the Best Times to Refinance
There are lots of situations when it could be smart to refinance your mortgage, provided it makes financial sense. The most common are listed below.
Recapturing some home equity. You’ve been paying your mortgage faithfully for two decades, but that kitchen is still glaring at you with its 60s model wall oven agape. It’s time to do something about that monster, once and for all. Refinancing to cash out some equity and bring your kitchen up to date is generally a good move, though you can also do this with a home equity loan or a HELOC.
Getting more favorable loan terms. When you first took your mortgage out, you were fresh off the turnip truck, had very little experience in your field and your credit was only so-so. Now, you career is stable, your income has increased and your credit’s awesome. You can probably get some good terms on a refinance, certainly better than the ones you started with.
Turning an adjustable rate mortgage into a fixed rate mortgage. Adjustable rate mortgages have been problematic for a lot of people, which is why it’s generally recommended to refinance before they start to adjust. Even though your adjustable rate is capped, that cap can still result in a payment that’s alarmingly high. Nail that rate down, even if it’s a bit more than you’d prefer in a perfect world.
Changing mortgage programs. You initially took out a loan through an FHA program, but the rates on conventional mortgages are looking pretty good these days. Although you can streamline that FHA mortgage to get the best rate available, it’s nothing like what the conventional loans at Main Street Bank have on offer. You’ll have to do a traditional mortgage refinance to change programs.
Shedding mortgage insurance for good. Mortgage insurance is the bane of so many homeowners’ existences. When you need it, there’s nothing else for it, but you intend to pay your mortgage payment, so why are you forced to carry this stuff forever? Once you get your home’s loan-to-value ratio at 78 percent with that FHA program, you can finally escape mortgage insurance by refinancing. Ask your banker before you commit, just to be sure you’re moving into the right program for long-term savings.
There are plenty of personal reasons to refinance, but we’ll not go into that here. Refinancing is smart if you do it strategically and not because your gut tells you that a quarter percent lower interest will save you all the money. There’s a lot more to your mortgage costs than the basic interest, though it’s hard to tell from the way some lenders advertise their products.