Refinancing your mortgage — taking out a new home loan to replace and pay off your old one — might sound like a daunting step. You probably have questions like, “Should I refinance? When’s the best time to do it? When is refinancing my mortgage going to be worth the effort?”
According to CNBC, applications to refinance home loans are much more sensitive to interest rate fluctuations as compared to home loan applications — and recently, those interest rates have ticked up (while still remaining extremely low, historically speaking). Like many things, the decision to refinance will depend on your individual situation. But it helps to know a few rules of thumb (and to talk to a trusted mortgage professional whenever you have questions).
Here are a few hypothetical scenarios in which refinancing might be a good financial option for a homeowner.
Scenario 1: You want to lower your monthly payment
Refinancing to lower a monthly payment might be as simple as refinancing at a lower interest rate. Let’s say you’ve done your research and learned that you could snag a loan at a lower rate than you currently pay. According a certified financial planner, refinancing begins to look like an attractive option when you can potentially drop your interest rate by at least a half-percent. If your credit score has improved recently, it could also have a positive impact on your mortgage rate, according to Forbes.
Sometimes refinancing to a loan with a longer term in order to lower your monthly payments makes the most sense for your current financial situation.
“Keep in mind that if you refinance with a mortgage that has a lower interest rate, but a longer term, you could end up paying more over the life of your loan,” the government’s Consumer Financial Protection Bureau says.
Scenario 2: You want to take out cash for home improvement or other big expenses
According to CNBC, Americans are sitting on trillions of dollars after home equity hit an all-time high earlier in 2018. As a result, the business news site said, many are opting to tap the equity in their home for cash to spend on renovations (which could increase the value of your home), consolidate debt in a way that could lower your monthly payments*, or education expenses. A “cash-out” refinancing option could be a good fit for those with these goals.
Scenario 3: You want to shorten the length of your loan
Refinancing is also an option for homeowners who are looking to shorten the term of their loan. A refinance that shortens the length of a loan could help anyone who wants to build home equity more quickly. It could also help anyone who is interested in reducing how much they pay in interest over the life of their loan, since 15- and 20-year mortgages typically offer lower rates than the traditional 30-year loan.
Scenario 4: You want to swap your adjustable-rate mortgage for a fixed-rate.
When interest rates are low, financial experts say it’s a good time to try and switch from an adjustable-rate mortgage to a more predictable fixed rate mortgage. Refinancing can help you do that, should you qualify.
No matter the situation, a refinance calculator like this one from Mr. Cooper can come in handy. Plug in information about your current loan and the loan you’re considering, and the calculator can help you determine whether refinancing makes financial sense at this time. Or, reach out to speak with a Mr. Cooper mortgage professional today.
*A debt consolidation refinance increases your mortgage debt, reduces equity, and extends the term on shorter‐term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that a debt consolidation loan may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, you should not carry new credit card or high interest rate debt.