When is the best time to refinance your home? It depends on your circumstances and goals. There are also broader economic factors that can be relevant. You should consider several questions before deciding if refinancing is right for you.
This article will look at when it makes sense to refinance your mortgage.
Refinancing is a good idea if you want to lower the interest rate on your current loan. A lower interest rate means less interest paid over time and more money in your pocket.
Refinancing is generally a good idea if you can reduce your interest rate by at least 2%. Some lenders believe a reduction of 1% is enough.
Lower interest rates could also be a way to shorten your term without having to increase your monthly payments.
For a 30-year fixed mortgage of $100,000, the term can be cut in half to 15 years by refinancing from 9% to 5.5%. The monthly payment remains almost the same—from $805 before (9%) down only slightly to $817 afterward (5%).
Although ARMs typically offer lower rates initially, payments can increase rapidly. Converting to a fixed-rate mortgage can lower your interest rate and eliminate the worry of future interest hikes.
Conversely, switching from a fixed-rate mortgage to an adjustable-rate loan can be sound under the right circumstances. If all signs point to future rate decreases, an ARM could cut your payments in the future.
If you need cash quickly, a cash-out refinance could provide the money you need. With a cash-out refinance, you get more money from the new loan than is needed to pay your current mortgage. You then keep the excess as a way to gain access to quick cash.
Cash-out refinancing allows you to tap into the equity you’ve built in your home. However, there are limits on how much of that equity you can access—usually around 80 to 90%.
The best time to refinance your home will depend on your situation. Take some time to consider the factors involved and do your research to decide if refinancing is right for you. It doesn’t hurt to compare a few lenders, as they may offer different benefits depending on your needs.
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