Whether you want a lower interest rate or the predictability of a fixed rate loan, homeowners are asking when the right time is to refinance their mortgage loan. Refinancing replaces your current mortgage with a new mortgage that has different terms. Follow these tips to find out if refinancing makes sense for you.
- Concerns about your Adjustable Rate Mortgage (ARM) – If your ARM is adjusting higher, you might want to get a fixed-rate loan.
- Lower monthly payments – Obtaining a lower rate or longer term could lower your monthly payments.
- Your finances have improved – If you've increased your income or improved your credit score, you may be able to qualify for a lower interest rate.
- Eliminate PMI– If your home's equity has improved to 20%, you might be able to eliminate private mortgage insurance (PMI). Check with your lender to see if you can eliminate PMI without refinancing.
- Consolidate debt or cash out equity – If you have equity in your home, you may want to refinance to free up cash for debt repayment. If your mortgage loan rate is less than your other debt, you'll save in interest charges and have the convenience of making just one payment. You could also use the funds for home improvements, educational expenses, or emergencies.
You've Decided You Want to Refinance
If you've decided that refinancing is a good decision, answering these questions can help make the process go more smoothly.
- What's the state of your current mortgage?
Check how many years you have left on the loan and how much interest you're currently paying, and if it is an ARM when the higher rate will be triggered. These facts, along with your original purchase price and if you're paying PMI, will help your lender choose the best refinance option for you. - Will refinancing save you money?
UNIFY's free, easy-to-use online Mortgage Calculator can help determine the true cost of refinancing. Besides the lower rate, take into account the new loan's cost, which includes bank fees, appraisals, legal fees, closing costs and, possibly, points. The calculator can determine if you'll be able to lower your monthly payment and how much you'll pay over the life of the loan. - What is your credit score?
To qualify for the lowest rate, you'll need a good credit score. You can get a free annual report from each of the three credit agencies at annualcreditreport.com. Do this before you apply and give yourself plenty of time to clear up discrepancies. - How long do you plan to be in your home?
Having a clear estimate of how long you'll be living in your house will help you determine if a refinance is best. While new loan costs can be offset by lower monthly payments, adding years to the life of the loan could cost you more in the long run. Keeping your ultimate goal in mind will help you decide if resetting the clock on your mortgage is worthwhile. - Who offers the lowest interest rates and loan costs?
Start with your credit union or the financial institution currently holding your mortgage. Not-for-profit credit unions traditionally offer excellent rates and have their members' best interests in mind. Your mortgage holder will be highly motivated to keep you as a client, especially if you've been timely with payments. When using the Internet to shop competitors' rates, be sure to add in the loan's total cost to make a fair comparison. - Should you wait for rates to go down?
You might be tempted to outsmart the market by waiting for rates to fall just a bit more before refinancing. But if the numbers are in your favor now, don't wait. Often, rates rise just as quickly as they fall, and higher rates may lessen the benefits of refinancing.
