Your credit score has improved since you applied for a mortgage
The higher your credit score, the more likely a mortgage lender is to offer you a lower rate on your home loan. If your credit score was mediocre when you first applied for a mortgage but has since risen substantially, your interest rate could drop a lot by refinancing.
You want to shorten your loan term to pay off your home sooner
Refinancing will often lower your monthly mortgage payment, but not always. If you refinance from a 30-year loan to a 15-year mortgage, you’re likely to find that your monthly payment goes up, because you’re now paying off your home in half the time. However, you could still reap major savings on interest throughout the life of your repayment period.
Usually, you’ll get a lower interest rate on a 15-year mortgage than you will for a 30-year loan. Going back to our example above, refinancing that $100,000 mortgage to a 15-year loan at 2.35% will raise your monthly payment by $197.06 rather than lower it. But you’ll also enjoy $47,825 in interest savings by repaying your mortgage loan in 15 years instead of 30. And, you’ll be clear of your mortgage debt sooner. That’s important if you’re aiming to have your home paid off in time for a specific milestone, like retirement.
For more on refinancing to a 15-year mortgage, check out our guide on the topic.
You want to extend your loan term to lower your monthly payment
Maybe you started out with a 15-year mortgage but are having a hard time affording your monthly payments. If that’s the case, refinancing to a 30-year loan could result in a much lower monthly payment because you’re now getting twice as long to pay off your home.
You want to lock in a fixed rate before your adjustable-rate mortgage gets more expensive
An adjustable-rate mortgage, also called an ARM, can save you money initially. Often, you’ll get to lock in a lower interest rate on that loan for a preset period of time (for example, five or seven years). But once that initial period ends, your interest rate could rise.
If you refinance to a fixed loan, however, you’ll lock in a guaranteed mortgage rate for the rest of your repayment period. That means you won’t have to worry about your monthly payment rising over time.
For more on refinancing to a fixed rate mortgage from an adjustable-rate mortgage, our experts have put together a guide for you.
You want to borrow against your home with a cash-out refinance
A cash-out refinance lets you borrow more than your remaining loan balance and use the extra money for any purpose. That might mean paying off debt, making home repairs, or financing home improvements.
Say your loan balance is $100,000. With a cash-out refinance, you might get a new home loan worth $120,000. The first $100,000 would be used to pay off your existing mortgage, and you’d then get a check for the remaining $20,000 to use as you please.
Note: You can do a cash-out refinance if your home is worth enough to cover the extra money you’re taking out. If you owe $100,000 on your existing mortgage and your home is only worth $100,000, you won’t qualify for a cash-out refinance.
When is it not worth it to refinance?
Refinancing a mortgage can save you a lot of money, but only under the right circumstances. It doesn’t pay to refinance when you won’t be staying in your home long enough to reap savings once you break even from your closing costs.
Imagine you’re charged $4,000 in closing costs to refinance and lower your monthly payment by $100. In that case, it will take you 40 months to break even and start saving money, so if you’re planning to move in two or three years, it’s not worth refinancing.
Similarly, refinancing isn’t worth it if you can’t snag a low enough interest rate on your new loan, because your savings may not be substantial enough to justify paying closing costs. Generally, it pays to refinance if you can lower the interest rate on your mortgage by 1% or more.
To recap, here’s when it’s worth it to refinance:
- Refinance rates are down across the board
- Your credit score has improved since you applied for a mortgage
- You want to shorten your loan term to pay off your home sooner
- You want to extend your loan term to lower your monthly payment
- You want to lock in a fixed rate before your adjustable-rate mortgage gets more expensive
- You want to borrow against your home with a cash-out refinance
If you’re going to refinance your mortgage, reach out to several refinance lenders and gather different offers to compare. You may find that one lender offers a lower interest rate on your refinance, lower closing costs, or both. The more offers you get, the easier it’ll be to find the best deal.
View more information: https://www.fool.com/the-ascent/mortgages/refinancing-worth-it/