3 smart times to refinance your mortgage
When you first purchase your home, there's a good chance you took out a 30-year mortgage. While that might have felt like almost a lifelong decision, the reality is that homeowners can often change their mortgages by refinancing.
With mortgage refinancing, you can take out a new loan to cover your old one, so you essentially switch from the terms of your old mortgage to those of the new loan. If interest rates dropped, for example, you might be able to refinance so that you have a mortgage that reflects those lower rates. Or, you might refinance to a 15-year term instead of a 30-year one, for instance.
If you think you could benefit from refinancing then start exploring your options and eligibility here now.
3 smart times to refinance your mortgage
While refinancing may not always make sense there can be many scenarios where you come out ahead. Accordingly, it could be worth considering refinancing when:
When you can get a significantly lower interest rate
If you can get a mortgage refi rate that's significantly lower than your current mortgage rate, then you could save money by lowering your monthly payments and reducing your overall interest payments. However, mortgage refinancing comes with average closing costs of around $5,000, according to Freddie Mac.
You might still come out ahead with a smaller difference between your old interest rate and new one, depending on factors like the loan size. Or, you might decide to wait to see if rates decline in the future so you can save more. To figure this out, it's good to do the math for yourself, or with the help of a trusted professional, to see what works for your circumstances.
Start checking interest rates here to determine if a mortgage refinance makes sense for you.
When you can drop your PMI
Another good time for mortgage refinancing could be if taking out a new loan lets you drop private mortgage insurance (PMI). Generally, you'll need to pay for PMI until your home equity level reaches 20%.
So, maybe you initially put 10% down to buy a home. Then, a real estate boom might have increased the value of your home, which counts toward your home equity. By refinancing, you can then get above that 20% threshold, as you might not have to put down as much when counting your home equity gains.
If you're close to reaching 20% with a couple more monthly payments on your current mortgage, the refinancing costs might not be worth it.
But if you can save the money that would have otherwise gone toward PMI payments for a longer period, especially if a new mortgage refinance loan has more attractive terms than your current mortgage, you might come out ahead via refinancing.
When you can reduce your loan term
If you find yourself in a position to refinance so you can reduce your loan term, that could pay off in the long run. Keep in mind that doing so often means your monthly payment goes up, but since you're paying off the mortgage faster — say, in 15 years instead of 30 — that could mean paying less interest over the course of the loan.
Suppose you got a raise and can afford a higher monthly mortgage payment. In that case, you might decide to pay off your mortgage sooner by refinancing to a shorter term. The specifics, however, depend on factors such as your current interest rate vs. the mortgage refi rate.
The bottom line
While these are general guidelines of when it might make sense to refinance your mortgage, they exemplify how refinancing can be financially advantageous for some homeowners. You also might gain some peace of mind, such as if you can refinance to a lower monthly payment that gives you more financial flexibility. Or, maybe you'd rather pay off your mortgage faster, so a shorter term works well for you.
Whatever the case may be, it could be worth considering how refinancing might benefit you personally. Not everyone has the same financial situation and goals, but it could be good to explore your options and speak with a trusted professional to see if refinancing makes sense for you now.
