Monday, August 29, 2016 / by Teresa DiPeso
5 Signs It's Time to Refinance
Interest rates are at historically low levels. So, now's the time to pick up the phone and refinance, right? Not necessarily! While that may be generally true, it all depends on your specific situation and financial outlook. Let's consider 5 reasons why it might behoove you to refinance.
1. Your mortgage rate is at least 1% over current rates: One rule of thumb says that if your interest rate is more than 1% over market rates, it makes sense to refinance. This would apply to many homeowners today, since approximately 38% of current homeowners have mortgage rates at least 1% higher than the current average rate of 3.5%.
2. You're paying mortgage insurance: If you didn't have the 20% to put down on your loan, you're probably paying mortgage insurance. But, with home values on the rise, you may soon cross that 20% threshold of equity in your home, allowing you to get rid of the insurance. Refinancing without having insurance can save you hundred each month!
3. You're not planning on moving anytime soon: Refinancing costs money, and you need to be willing to stick around long enough to recoup the initial cost, which can be between 3-6% of your loan amount. Generally, you'll want to recoup this within 3 years. One alternative is to have the lender pay the closing cost, which will result in a slightly higher interest rate. Break out your calculator and see which one works better.
4. You want to shorten the life of your loan: Most people get 30 year terms on their mortgage, but if you can afford to refinance into a 15 year loan, you may come out better for it, nabbing a lower rate. Of course, your month payment will be higher, but in the long haul you'll save A LOT. Again, consider how long you plan to stay, and whether or not you're making more money than when you took out the original loan.
5. You need a cash out refi: With cash-out refinancing, you take out a loan for more than the amount you still owe on your home, and pocket the difference. Because lenders allow you to spend the money at your discretion, you should have a good, legitimate need for it. Good reasons include paying off high interest credit card debt or emergency home repair. Bad reasons? Think vacations and jet skis!
1. Your mortgage rate is at least 1% over current rates: One rule of thumb says that if your interest rate is more than 1% over market rates, it makes sense to refinance. This would apply to many homeowners today, since approximately 38% of current homeowners have mortgage rates at least 1% higher than the current average rate of 3.5%.
2. You're paying mortgage insurance: If you didn't have the 20% to put down on your loan, you're probably paying mortgage insurance. But, with home values on the rise, you may soon cross that 20% threshold of equity in your home, allowing you to get rid of the insurance. Refinancing without having insurance can save you hundred each month!
3. You're not planning on moving anytime soon: Refinancing costs money, and you need to be willing to stick around long enough to recoup the initial cost, which can be between 3-6% of your loan amount. Generally, you'll want to recoup this within 3 years. One alternative is to have the lender pay the closing cost, which will result in a slightly higher interest rate. Break out your calculator and see which one works better.
4. You want to shorten the life of your loan: Most people get 30 year terms on their mortgage, but if you can afford to refinance into a 15 year loan, you may come out better for it, nabbing a lower rate. Of course, your month payment will be higher, but in the long haul you'll save A LOT. Again, consider how long you plan to stay, and whether or not you're making more money than when you took out the original loan.
5. You need a cash out refi: With cash-out refinancing, you take out a loan for more than the amount you still owe on your home, and pocket the difference. Because lenders allow you to spend the money at your discretion, you should have a good, legitimate need for it. Good reasons include paying off high interest credit card debt or emergency home repair. Bad reasons? Think vacations and jet skis!
