Refinancing Your Home: When is the Best Time?

The refinancing process replaces your current home loan with a new one. Like many homeowners, you may be unsure of the best time to refinance your home. Here are some scenarios where you should consider refinancing.

Mortgage Rates Have Reduced

Refinancing when mortgage rates drop makes sense, as a lower interest rate can save you money on interest and monthly payments. The traditional rule of thumb has been to refinance if the rates drop by 1–2 percent.

However, even a half-point reduction might make financial sense if you consider the money you save if you refinance. For instance, a homeowner with a $400,000 mortgage saves a lot more on a 1 percent reduction than one with a $100,000 home loan.

The best tip is to crunch the numbers and determine how much you stand to save. Refinancing expenses like an appraisal, title insurance, and origination fees quickly add up and eat into your savings.

Additionally, closing costs typically total 2–5 percent of the loan's principal amount. Your lender will likely let you add the closing costs to your loan, but you pay more in interest and won't enjoy the refinance benefits for a while.

You Have Better Credit

If your current score is higher than when you took out your home loan, you can consider refinancing to get better rates. When you make timely mortgage payments and borrow less, you may be surprised at the improvement in your credit score.

A credit score of 620–720 is a good range to shop for lenders, while a score of 760 and higher gets better rates. However, you can still refinance with lower scores with certain lenders or government programs.

Your Home's Value Has Risen

Refinancing as home prices rise can accrue numerous benefits, such as reducing the total cost of your home loan. If your home's value has significantly increased since you got the original mortgage, you can take out a cash-out refinance on your home's equity. The cash can finance renovation projects or help you attain other financial goals like paying down other debt.

You Want a Shorter Loan Term

If you are keen to pay down debt or your income has increased, you may want to shorten the term on your home loan. For instance, you may want to refinance your 30-year mortgage to a 15-year mortgage that helps you own your home sooner.

The good news is that shorter loan terms attract lower interests, saving you money over time. But, expect increased monthly payments that could dent your savings. On the other hand, if interest rates fall substantially, you can probably refinance with a shorter-term loan without drastic changes in monthly rates.

If you manage the monthly payments, refinancing is a great move as it also helps you build equity in your home quickly. However, you can also extend your mortgage to enjoy reductions in your monthly payments if you have difficulty making your current payments.

You Want to Change the Loan Type

A refinance lets you change the loan type as your lifestyle changes. For instance, if you started with an adjustable-rate mortgage, you may desire the certainty of a fixed-rate mortgage rate after some years.

Adjustable-rate mortgages offer a fixed interest rate for a specific period, after which your lender adjusts your rate periodically according to the market rate. These adjustments can result in interest hikes, and a fixed-rate home loan may give you lower rates or monthly payments.

Other homeowners refinance to get rid of an FHA, which requires loan holders who put less than 10% down to pay mortgage insurance for the life of the loan. According to Forbes, once you attain 20% equity, you can often replace the FHA loan with a conventional loan.

Refinancing can be an excellent move when it reduces your interest rates or helps you take cash out against your equity. At Secure One Capital, we customize mortgage solutions with rates below the national average. Contact us today for efficient mortgage services.