Written by Kathryn Schmitz, AVP - Retail Loan Officer | NMLS# 256515 | firstname.lastname@example.org
In today’s interest rate environment, you may be wondering if you should refinance your mortgage. Refinancing your mortgage can help you save money each month and reduce the total amount of interest you pay over the life of the loan. It could also allow you to use the equity in your home to cash-out and pay down debt, complete a home project, or make a large purchase. Here is how to determine whether you should refinance.
Can I lower my interest rate?
One of the most common reasons to refinance your home is to obtain a lower interest rate. This is one of the easiest ways to save money on your monthly payments. When you initially purchased your home, you may have had to take on a higher interest rate due to market conditions or your financial well-being at the time. If you had just graduated college when you bought your first home, you may have had more debt and a lower credit score, resulting in a higher interest rate. If you have improved your financial situation, you may be in a better position to qualify for a lower interest rate, especially if market conditions permit. Lowering your interest rate can make a huge difference in your monthly payments.
Do I want to change my loan terms?
There are many types of mortgage terms that are available to you. What worked for you when you first took on your mortgage may not be the most viable option for your current situation. For example, you may have an adjustable rate mortgage (ARM), where the interest rate adjusts annually. If you are currently on a tight budget, you have the option of establishing more consistent, affordable payments through refinancing. You may refinance to a 30-year fixed rate mortgage that will give you a stable interest rate and the same payment throughout the duration of the loan.
If your financial situation has drastically improved, you may want to refinance your home to a shorter mortgage term. For example, a 15-year fixed rate mortgage can yield much lower interest rates and allow you to pay off your home quickly.
What is the value of my home?
Typically, one of the first steps in refinancing your home is to obtain an appraisal. Your current home value can have a major impact on whether you refinance. If your home value has increased, you may be able to get rid of PMI (Private Mortgage Insurance) if this is something you were required to have when you purchased your home if your down payment wasn’t large enough. Once you have 20% equity in your home, you can have this removed as part of the refinance. Another option if your home has increased in value is to tap into that new-found equity for things such as home improvements, home repairs, consolidate higher-interest debts, or perhaps help pay for a child’s college tuition
If your home value has gone down, you may want to reconsider the refinancing process. You may not have as many benefits and could actually lose out on some of the equity that you currently have. This is why an appraisal can give you a clearer picture of the current market and your available options.
How long do I plan to live in this home?
How long you plan to live in a home can impact the refinancing decision. As there are typically closing costs involved in the refinance process, you want to make sure you are making a good return on your investment. Closing costs can end up being thousands of dollars. If you plan to move in a couple years, it may not make sense to refinance if you don’t believe you will be able to offset the closing costs.
For example, if your closing costs total $2,000 and your new mortgage payment saves you $100 monthly, it will take 20 months to offset your closing costs. As such, it would not make sense to refinance if you plan to move in less than 20 months.
If you’d like to learn more about whether refinancing is right for you, speak with one of our knowledgeable bankers today!