Timing is everything in certain parts of our lives, and one of the best examples here within the financial sector is determining when to refinance a mortgage (if at all). There are certain settings where refinancing your mortgage will be extremely prudent and could offer several major financial benefits, but also others where refinancing holds little to no purpose and may actually cost you money as a result.
At Altius Mortgage and our partners with Mortgage Ogden, we're here to help. We offer the best mortgage refinancing services
in the state, plus expert loan officers who will help guide you and determine when the ideal time might be for refinancing your home loan. What are some specific settings or situations where this is often the right move to make? Here are several to consider.
What Does Refinancing Mean?
Before we get into some specific examples of when refinancing might be a good idea, let's briefly go over what refinancing actually entails. In short, this is the process of taking out a new mortgage loan to pay off your existing one, ideally with more favorable terms in place. This could involve getting a lower interest rate
(thus reducing your monthly payments), switching from an adjustable-rate mortgage to a fixed-rate one (or vice versa), or extending or shortening the terms of your loan.
In many cases, refinancing can save you huge sums of money over the life of the upcoming loan. Our next few sections will look at some of these cases.
Interest Rates Are Much Lower
If you took out your loan when interest rates were much higher than they are now, it might make sense to refinance in order to lock in a lower rate. This could lead to some serious savings on your monthly payments, and also help you pay off the loan much more quickly as well.
Of course, this only makes sense if you plan on staying in the home for at least a few more years. Otherwise, you might not end up saving enough money to make the refinance worth your while.
Another important consideration here is that you'll likely need to pay some closing costs when you first refinance the loan. As such, it might not make sense to refinance unless interest rates have dropped by at least 2% or so. Otherwise, it could take quite a while for the savings to add up and offset these costs.
You Need to Make Some Major Home Improvements
Another common reason to refinance is if you need to make some substantial home improvements but don't have the cash on hand to pay for them outright. In this case, you might be able to roll the costs of these improvements into your refinanced mortgage loan.
This could be a great way to get the work done that you need without having to come up with a large sum of cash all at once. It's important to note, however, that this will increase the total amount you owe on your home and could lead to higher monthly payments as well.
You Have an Adjustable-Rate Mortgage -- And Want to Switch
If you originally got an adjustable-rate mortgage (ARM), there's a good chance that your interest rate will eventually go up. If you're not comfortable with this possibility or simply want to lock in a lower rate, refinancing into a fixed-rate mortgage could make sense.
Of course, there are also certain cases where an adjustable-rate mortgage makes more sense than a fixed one. It all depends on your specific financial situation and needs.
You Want to Pay Off Your Mortgage More Quickly
If you're hoping to pay off your mortgage as quickly as possible, refinancing into a shorter-term loan could be a good idea. This will lead to higher monthly payments but will also help you get the loan paid off more quickly.
Just be sure that you'll actually be able to afford these higher payments before moving forward with this option. If it turns out you can't, but you move forward with refinancing anyway, you're risking major damage to your overall finances, including possibly starting a debt cycle that could be difficult to get out from under.
Your Credit Score Has Gone Way Up
Another key factor to consider when refinancing is your credit score. If this has increased substantially since you originally got the loan, it could lead to some major savings.
This is because your credit score is one of the key factors that lenders look at when determining your interest rate. So, if yours has gone up, you might be able to qualify for a significantly lower rate than you originally got.
You Have Private Mortgage Insurance and Want to Get Rid of It
If you put less than 20% down on your home when you purchased it, there's a good chance that you're currently paying for private mortgage insurance (PMI). This is an insurance policy that protects the lender in case you default on the loan.
While this insurance is required if you don't have a large enough down payment, it's not something that you generally have to pay for the life of the loan. Once you reach 20% equity in your home, you can typically request that the lender cancel your PMI policy.
If you're getting close to this point, refinancing into a new loan could be a good way to eliminate this extra cost from your monthly budget. Just be sure to compare the total costs of refinancing with the amount you'll save on PMI to make sure it's worth it.
For more on the situations where you might look at refinancing your mortgage, or to learn about any of our mortgage rates or other services, speak to the team at Altius Mortgage