Signs You Should Refinance Your Mortgage
Refinancing your mortgage can save you thousands of dollars in interest. It can also reduce your monthly payments significantly. So what are the signs that it’s the right time to refinance your mortgage? Here are the top things to look for that can help you determine if it’s time for a refinance of your home loan.
Your Interest Rate Is Higher Than 4%
Interest rates have been at historic lows for a couple of years now, but they’re especially dropped this year. Average rates on 30-year mortgages have dropped to a record low 3.13%, according to the popular weekly survey from mortgage company Freddie Mac. Things are a lot different from a year ago when borrowers were typically landing rates closer to 4%. Today’s exceptionally low mortgage rates are a positive side effect — if you want to call it that — to the economic uncertainty due to the coronavirus pandemic.
If you closed on your mortgage 7 or more years ago, chances are that your interest rate is higher than the current rates. This is the number one reason you should refinance your mortgage, to lower the rate. Since home loans typically have a very large loan amount, the interest rate has a huge impact on the payments. A single percentage point can cost thousands of dollars a year in interest. One recent LendingTree study found that homeowners who refinance home loans that were taken out in early 2019 can save $60 a month for every $100,000 borrowed. The average lifetime interest savings add up to about $20,000.
Your Credit Has Improved
The best mortgage rates go to the borrowers with the best credit. Credit scores range from 300-850, but a score good enough for the lowest rates would need to be in the 705+ range. If you got your original mortgage at a time when your credit score was lower than it is today, chances are the rate you received is much higher than what you can get now with a much higher credit score. You will want to maximize your credit score before applying to refinance your home loan. Make sure you pay off your credit card balances, check your credit report for any errors and make sure all your bills are being paid on time.
You Plan On Staying For A While
Like any mortgage, refinancing will come with a price tag. You’ll have to pay closing costs and taxes, which normally total around 2-5% of your total loan. Because of these closing costs, it can take months or even years to break even and begin the actual savings. If you are moving or selling soon, refinancing may not be a great idea. But if you plan to stay in your home, a refinance can truly save you money in the long run. A refinance into a loan with a lower rate will truly save you money if you plan on remaining in the home long enough to more than make back your closing costs. If your new loan cuts your monthly payment by $100, that’s a $1,200 savings a year. If you have to pay $5,000 in closing costs, it’ll take you more than four years to recover that expense through your refinance savings. Make sure you do the math and consider your future plans before moving forward with a refinance.
You Want to Cash Out or Consolidate
A cash-out refinance may be right for you if you are ready to cash out on built-up equity on the home. Homeowners choose to cash out in order to pay for education, additional home improvements, eliminate other debt, or start a new business. Cash-out refinances, home equity loans, and HELOC loans allow homeowners to get a loan using the equity in your home. You can borrow up to 80% of the value of your home. For example: If your home is worth $300,000 and your loan balance is $200,000 you can borrow $40,000 dollars which will make the total loan amount between the 2 mortgages 80% of the value of the home. You can also use the cash-out refinance option to consolidate multiple high-interest debts into one singular and often lower payment.
Refinancing your mortgage into a lower rate is often a very good idea. Refinancing isn’t free, there are closing costs associated with a mortgage refinance just like there is with a first mortgage. Make sure that there is a net tangible benefit and you will be saving money even after factoring in the fees. Speak with a Galaxy Lending Group Loan Officer today to learn more about your refinancing options and if this move could be right for you.