While mortgage interest rates have been unpredictable and volatile for the past couple of years, it helps to be ready for a drop at any time. A decline in interest rates is one of the most common reasons homeowners choose to refinance their loan, but it’s not always right for everyone.
Whatever your reason for looking into refinancing, you may want to first assess your current financial situation before you decide to refinance.
Understanding Refinancing
You may have heard the term, but if you haven’t been through the process before, it helps to learn the basics of refinancing. In layman’s terms, refinancing entails replacing your current home loan with a new one with often more favorable loan terms. Your old mortgage would be paid off with the new one, so you’d still have one loan and one monthly payment.
As with any other mortgage, you’d apply for a refinance, go through the loan process and pay closing costs.
Types of Refinance Loans
There are many refinancing options out there, depending on which lender you get your loan from. Here are some of the most common:
Rate and Term Refinance
An interest rate drop is one of the most popular occasions in which homeowners decide to refinance their mortgage. Securing an interest rate that’s lower than the interest rate you have with your current mortgage could help you save money on interest each month. You may be able to do this with a rate and term refinance.
Being mortgage-free sooner is also a goal many homeowners have. After all, who enjoys paying that additional bill every month? You may be able to shorten the term of your mortgage with a rate and term refinance and pay off your loan faster. However, this does mean that your monthly payment may end up being notably higher than before because you are paying off more of the principal balance each month.
Cash-Out Refinance
Whether there’s a remodeling project you’ve yet to get started on, debt to consolidate or a new, more reliable car you need to buy, you could get a cash-out refinance to tap into your home equity and receive the funds you need at closing.
Keep in mind you will need to have paid off enough of your mortgage to receive a sufficient amount of money for your needs. Additionally, since you’d be taking out a larger loan than your old one, your monthly mortgage payments may be higher.
Streamline Refinance
Streamline refinances are an option for homeowners who have a Federal Housing Administration (FHA) loan. This type of refinance is designed to bypass some paperwork, helping speed up the loan process. Some information you may not need to provide include your credit history, income or an appraisal.
When is it the “Right” Time?
The “right” time to refinance really depends on you. Here are some situations in which you may want to consider one.
Favorable Market Conditions
In general, borrowers tend to refinance when mortgage interest rates have dipped or are significantly lower than when they first obtained their mortgage. However, you may need to determine whether your monthly savings with the new interest rate would be worth it compared to your old interest rate first.
Stable Personal Financial Situation
If your income has increased since obtaining your mortgage, refinancing for a shorter term could help you pay off your mortgage faster. With a shorter term, you could increase your monthly payments, potentially pay less in interest over time and get rid of this debt sooner rather than later.
The Benefits Outweigh the Costs
Don’t forget that refinancing your mortgage has a cost. In some cases, your closing costs may not be worth the money you save monthly with a new interest rate, especially if you don’t plan on living in your home for a long time.
Tap into Your Home Equity
Emergencies or large necessary expenses could be reasons to apply for a cash-out refinance. Many borrowers use a cash-out refinance to put money back into their homes with home improvement projects to potentially increase its market value. Additionally, a cash-out refinance could help you pay down high-interest debt and/or consolidate your debt.
You’re Eligible to Refinance
To refinance your mortgage, you still need to meet minimum requirements. These can vary by lender and the type of refinance loan you want, but in general, you’ll need a certain amount of equity in your home (for a cash-out refinance) and a sufficient credit score and debt-to-income ratio before you’re able to qualify for a refinance. Speak with your lender to get specific details for your unique situation.
Is Refinancing Right for You?
The reasons for refinancing a mortgage are different for each homeowner, and it’s up to you to determine whether you should move forward with the process or wait until you can reap more benefits. Before you apply for a refinance, make sure you consider how the new loan could impact your finances and if you can handle it.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
