When to Refinance a Mortgage?
Talk to different people and you would likely receive different answers regarding the right time to refinance a mortgage loan. The right time for one homeowner may not be the right time for another. For this reason, it's imperative to assess your own personal situation to determine the best time to seek a new home loan to replace your existing mortgage.
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Staying In Home
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Do you plan on staying in your home for another three, four or five years? If so, now may be a good time to refinance your home loan. Refinancing a mortgage loan will involve out-of-pocket expenses known as closing costs, which can cost up to 6 percent of the loan balance. You're likely refinancing to save money on interest and reduce your monthly payment. But for a refinance to make sense from a financial standpoint, it's wise to live in the home until you break even, or recoup the money spent on closing costs. Take the monthly savings after refinancing and divide this by the amount of your closing costs to determine how many months you have to stay in the home to break even.
Boost Credit Score
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Refinancing to save on interest is pointless with a low personal credit score. A lender may approve your refinance request with a low FICO, but it will not give a prime rate. Start improving your credit score and aim for a rating of 740 or higher. Periodically check your credit score at Myfico.com, and once you've acquired a better rating, refinance your home loan to lower your mortgage rate and mortgage payment. Paying bills on time and getting rid of debt are both credit score boosters.
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Avoid Rate Adjustment
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Avoiding a rate adjustment is a top reason why some homeowners refinance their mortgage loans. Rate adjustments are common with adjustable rate mortgages. While these types of interest rates feature lower rates during the beginning years, rates can increase with each scheduled adjustment and increase mortgage payments. Borrowers who want predictable monthly payments can refinance their mortgage loan to a fixed rate.
Need Cash
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Having equity in your home creates the opportunity to refinance and borrow cash using your equity as collateral. Typical home loan lenders require at least 20 percent equity for mortgage refinancing. Borrowers who meet that requirements and those with a lot of equity in their home have the option of a cash-out refinance. Borrowers borrow against their equity, and lenders roll the borrowed funds into the new mortgage balance. This presents a good opportunity to make home improvements on a property, pay off credit cards and other debts or put money aside for savings.
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References
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