When Is The Best Time To Refinance?

Refinancing a home loan is a great way for the homeowner to improve the terms or rates of their mortgage when the time is right.

But when exactly is the right time to consider a refinance? There are some important considerations when deciding whether to refinance. For most homeowners the main purpose of refinancing is to either shorten the term of the loan, reduce the monthly payments, switch between a fixed-rate or adjustable-rate loan, or use home equity.

A Drop in Interest Rates

One obvious indicator that it may be time to negotiate new terms on your home loan is when there is a drop in the prime lending rates. You can save a bundle on your mortgage with just a few points difference. Other factors should be considered first, however, to determine whether a lower rate in itself is enough to justify a new mortgage. For instance, closing costs must be weighed against monthly payment savings to find out where your break-even point will be. That is, how long will it take you to realize actual savings on your refinance. Which leads to another consideration:

How Long You Intend to Live in Your Home

If your current home is where you intend to stay for a while, refinancing may be beneficial over the long term, since your break-even point will leave you adequate time to save money. If, on the other hand, you’re within a few years of moving, you may never see a saving over your closing costs. Likewise, an adjustable-rate mortgage over a short period can save money on a home loan versus a fixed-rate mortgage, if you’re planning to sell within a year or two anyway.

Also, home buyers whose loans carry a pre-payment penalty may be ill-advised to refinance, since the time it will take to break even is extended still further.

Cash-out Refinancing

For many homeowners, refinancing is a way to borrow cash for other needs. A refinance above what is owed on the house can help pay down other debts. If the added cost in house payments can be offset by paying off old credit card debt, for example, it may be worth refinancing. Depending on how long you plan to stay in your home, you could recover the cost of refinancing within a few years, though you would also need to consider the adverse effect on your home equity. A refinance is more likely to pay for itself if you don’t plan to sell your home for at least a few years.

Higher Property Values

As property values go up around the country, so does home equity in those areas. When equity increases, the more favorable refinancing options you’ll be able to negotiate. As of June of this year, Ellie Mae calculated the average cost of a 30-year mortgage at 4.12% on a conventional loan.

Credit Score

The higher your credit score, the less assumed risk a lender undertakes in extending credit in the form of a long-term loan such as a mortgage. Refinancing may be beneficial to you after you’ve established a solid history of timely payments. Conversely, care should be taken to avoid opening too many lines of credit as a new homeowner, which can lower your score.

Types of Refinancing Available

An FHA refinance can help save homeowners who have less than ideal credit, or less (or no) equity in their homes. FHA loans require a smaller down payment, though there are some up-front costs to consider as they require insurance since they are guaranteed by the Federal Housing Authority.

Another alternative is to refinance with a VA loan. Qualified veterans or active duty military personnel can refinance their homes without any equity, lower income-to-debt ratio and smaller down payments than with conventional loans.

Refinancing the “Home in Five” Loan

Arizona home buyers who purchased through the “Home in Five” program can save via lower interest rates by refinancing within the first 12 months. Via the grant made possible through the Industrial Development Authorities in Arizona, buyers saved 5% (veterans, 6%) on their home purchase.

Refinancing through the Home in Five program within 12 months allows buyers to keep the grant, and qualify for lower rates at the same time. And since your purchase was made within the past 12 months, the closing process is faster, no appraisal is needed and you could qualify for zero closing costs.

Galaxy Lending Group is a caring and experienced lending team serving residents of Arizona, offering outstanding customer service and professional assistance to home buyers all across the state. If you’re thinking of refinancing your current home or would like to get pre-approved for a new home, come visit us or apply online here. We are committed to helping you realize financial freedom and the home of your dreams.