When to refinance a home loan is a question that every homeowner asks themselves at some point in time. Refinancing is the process of obtaining a new mortgage loan that pays off the original loan. There are many benefits to refinancing your home. However, refinancing also has its disadvantages. There are many factors that need to be considered carefully before deciding to refinance. Timing is an important factor when refinancing your home.
Understanding the Refinancing Process
The refinancing process consists of several steps. Here’s what you should know before committing to the process.
Refinance Loans Types
Generally speaking, there are two main types of refinance loans.
Rate-and-term refinancing allows you to refinance the remaining balance of your current loan for a lower interest rate or cheaper monthly payment. A cash-out refinance allows you to receive cashback in your pocket, which you can use for other purposes. Most people refinance their homes in order to get a lower rate or monthly payment. However, there are other situations when refinancing makes sense. For instance, you may want a shorter loan if you want to get out of debt sooner and have extra cash to afford higher monthly payments.
Steps Involved in Refinancing
Each homeowner has to go through these steps to get a refinance:
- Step 1 – Know What You Want: Check your mortgage balance and determine the objective of your refinance.
- Step 2 – Compare Lenders: Assess lenders based on their rates, terms, features, and other factors.
- Step 3 – Gather Your Paperwork: Lenders will request basic documents verifying your identity and income.
- Step 4 – Submit Applications: It’s a good idea to submit several applications within a short amount of time to limit the impact on your credit score.
- Step 5 – Compare Offers: You can compare rates and terms from lenders and decide on the best one. You will have to get your home appraised before finalizing an offer.
- Step 6 – Show Up for the Closing: You will then close on your loan and pay any necessary closing costs. You can also roll these costs into the backend of your loan.
Potential Costs of Refinancing
Refinance loans are not free. There are closing costs associated with every refinance loan that can total thousands of dollars. One important step before deciding to refinance is to calculate the breakeven point. The breakeven point is the time that it takes for the loan to pay back the cost of refinancing. For example, if a loan has $3,000 in closing costs but saves the homeowner $100 per month, it will take them 30 months to break even. Some experts say that a drop of even an eighth of a percent can save thousands of dollars over the life of the loan.
With a mortgage refinance calculator, users can enter information on their current loan, such as terms, interest rates, payment amounts, and balances. After entering all required loan information, users would then enter the terms of their new loan to calculate their new monthly payment amount.
Understanding the Timing of Mortgage Lenders
Lenders have monthly, quarterly, and yearly quotas that they must meet. Few people can keep the same sales momentum going all month.
The last two weeks of the month are normally when loan originators are heavily focused on obtaining new loans in order to meet their quotas. This may benefit the borrower because some lenders may lower the interest rate or waive some lender closing fees in order to close enough loans to fill their quota. Generally speaking, the last two weeks of the month is the best time to refinance your mortgage. The last month of the quarter, March, June, September, or December, are the best times of the quarter to refinance.
Determining the best time of the year to refinance a mortgage can be a little trickier. Loan officers are typically more aggressive in closing new loans during the fourth quarter, hoping to finish the year strong and generate a larger performance bonus. Due to loan officers scrambling to close as many loans as possible during the fourth quarter, this time of year is typically the best time for homeowners to refinance.
When to Refinance Your Mortgage: Finding the Right Time
Wondering if now is the right time to refinance a mortgage? These are some signs that it may make sense.
Interest Rates Have Improved
You should only refinance if it saves you money or allows you to take out enough cash. Economic cycles featuring lower interest rates offer more opportunities for homeowners who want to save money with a refinance. Assume you pay $1,500 per month in principal. A 4% interest rate will increase your monthly payment by $60/mo. However, a 7% interest rate will tack on an additional $105 to the same mortgage payment.
During the Breakeven Period
You can divide your total refinancing costs by the monthly savings to determine your breakeven period. This number indicates how many months you have to pay the new mortgage before you break even on closing costs. If you pay $10,000 for a refinance and save $400/mo, it will take 25 months to break even on the expenses.
It wouldn’t make sense to refinance this loan if it only has two years left. However, you can end up with a bargain if you have 10 years left on your current mortgage.
To Access Your Home’s Equity
If you are struggling financially or you need costly home repairs, refinancing would allow you the opportunity to use that money where you need it the most. You have built your home equity over time with consistent mortgage payments, a down payment, and any appreciation. You can tap into it for financial emergencies, vacations, or any other reason.
To Get a Shorter Loan Term
A shorter loan term comes with higher monthly payments but will get you out of debt sooner. Some homeowners raise their incomes and are better positioned to pay off their mortgages. Removing this expense from your budget sooner will free up your money for other expenses. Even trimming a year off your mortgage can greatly impact your long-term finances.
To Get Rid of an FHA Loan
FHA loans are great starter loans. These financial products allow you to buy a house even if your credit score is as low as 500. However, these loans have mortgage insurance premiums that don’t go away once you reach 20% equity. You can refinance into a conventional mortgage to avoid additional insurance premiums. You might even get a lower interest rate and better terms if you have improved your credit score.
To Get Rid of PMI
You can put cash into your mortgage to stop paying private mortgage insurance. This extra expense goes away if you have 20% or more equity in your home. A refinance can help you reach that 20% threshold sooner.
To Switch from an Adjustable-Rate Mortgage to a Fixed-Rate Mortgage or Vice Versa
You may want a different type of rate for your mortgage. Adjustable-rate mortgages are usually lower, but they are variable and can increase over time. However, these same rates will decrease over time if the Federal Reserve lowers its rates.
Some people prefer the stability that comes with a fixed interest rate. You won’t have any surprises with your monthly bills. If you want the other type of rate instead of the one that you currently have, a refinance can help.
Your Income and Credit Score Have Improved
If your credit score or income has increased substantially, you may be able to lower both your monthly payments and interest rates by refinancing. These are two of the most significant factors lenders assess before giving you a mortgage.
When It Might Not Be The Best Time to Refinance Your Mortgage
It’s not always a good time to change your rate and terms. If interest rates are rising, you may want to stick with your current mortgage. In addition, make sure you can afford the closing costs. While you can roll these costs into the back of your plan, paying them upfront is optimal. Consumers should also review their credit scores before applying for a refinance. Building your credit score before reaching out to lenders can help you get a lower rate in the future. Rushing into the process with a low credit score will make the entire process more expensive.
You have to decide if refinancing makes sense for your financial situation. Some people can benefit from being patient with the process and getting everything else in order first. It’s also important to consider whether a home equity loan or line of credit will fulfill your goals. Some homeowners prefer to keep the current rate and terms for their mortgages while using a secondary mortgage to tap into additional equity.
Conclusion: Maximizing the Benefits of a Refinance
Interest rates can fluctuate daily. Homeowners should always compare rates from multiple lenders before refinancing their homes to ensure they get the best rate possible. When refinancing your home loan can be a tricky decision. However, with a little extra consideration, homeowners can refinance their loans to get the loan that works best for their situation. This link will provide the current interest rates for the four basic types of mortgage loans.
In summary, when refinancing your home loan comes down to good timing. However, there are other things to consider when refinancing. From your personal loan situation to the benefits you are hoping to achieve, as well as the time of the year. All can have a major impact on the decision to refinance.
