People get mortgages to make the dream of owning a home possible, but with a changing economy, many borrowers want to take advantage of today’s rates before they increase. Refinancing is a great way to do this. Basically, a refinance allows borrowers to take out a new loan to replace the old one. As a result, refinancers are required to go through the same steps they went through when taking out their original mortgage, such as a home appraisal and credit check. The new loan will have rates or terms that better serve the needs of the borrower. So, when is refinancing your mortgage a good idea? Most likely with one of the following scenarios.
When You’ve Owned Your Home For a Long Time
If you have owned your home for a long time, refinancing may be a smart option for you. Interest rates are still low (relative to previous years), so you may be able to lock in a lower rate. In fact, according to various industry experts, if you can lower your rate by even 1 percent then it is typically worth the refinance. With lower rates, you will not only have the opportunity to save on monthly payments, but you’ll also have the option to shorten your overall loan term without seriously increasing your mortgage payments. Of course, this shift depends on how much interest rates have dropped since your initial mortgage.
When Your Property Value Has Increased
Whether you just completed renovations on your home or you see an influx of consumers in the market, your property value will increase—and the higher the home’s equity, the lower the homeowner’s loan-to-value (LTV) ratio. Similar to a borrower’s credit score, the loan-to-value ratio is evaluated to determine the borrower’s mortgage rate. When the LTV is low, the borrower is considered less risky for the lender, so they receive lower interest rates on their monthly payments. If your LTV has decreased, it may therefore be a great time to refinance.
When You’ve Raised Your Credit Score
Your mortgage rate is highly dependent on your credit score, so it could be time for a refinance if your score has recently improved. Homeowners will typically qualify for the lowest rates if their credit score is around 720. Consult with a lender to see if this is the right option for you.
When the Math Makes Sense
There are many additional costs associated with refinancing such as appraisal fees, lender fees, points and closing fees. If a break-even point is a quick possibility, however, refinancing could be a great option for you. The break-even point refers to the amount of time it will take for monthly savings originating from the refinance to offset the cost of the refinance. If you qualify for a low-cost (or even no-cost) refinance then you will hit a break-even point relatively quickly.
With mortgage rates expected to continue increasing throughout 2018, it’s important for homeowners to consider refinancing sooner rather than later. For more information about when refinancing is a smart decision, or to learn more about home financing in general, contact one of our mortgage specialists today.