When Is the Right Time to Refinance Your Mortgage?
Mortgage refinancing is when you pay off your existing home loan with a new one. Homeowners refinance their mortgage for a number of reasons, mainly:
- To get a lower interest rate
- To cash out equity for large purchases and financial emergencies
- To shorten the life of a mortgage
- To convert from one type of mortgage to another
To maximize the benefits of refinancing, you must only do so when it makes sense. Keep in mind that refinancing can be a risky move, and it takes a lot of time to process. That said, it’s best to push through with refinancing if the following signs are present.
You want to renovate your home
One of the main reasons why people refinance their home is to fund large home renovation projects. Acquiring a home renovation loan is a great way to generate funds for renovation expenses. But if a home renovation loan is not the best option for you and you have substantial equity in your home, refinancing should be your next consideration.
Cash-out refinancing is when you get a new loan that is higher than your outstanding balance on the current mortgage, and receive the difference in cash. The lump-sum amount will allow you to fund major renovation projects, as well as other large expenses like college tuition, medical bills, vehicles, and properties.
You have a strong credit score
A good credit score is one of the first things lenders look for when assessing people for refinancing. Aside from increasing your chances of qualification, a good credit score will also help you get lower interest rates.
If your credit score has recently increased and is far better than the credit score you’ve applied for your current mortgage with, it’s a good sign that refinancing is right for you. A credit score of 680 and above can get you a low interest rate when you decide to refinance.
Your income has grown
Over time, our income increases as we climb the career ladder. Putting that extra money towards your mortgage is a great idea. Not only will you save money on the biggest debt you have, but you can also make a significant reduction in your loan term.
If you are making more money now than when you first secured your mortgage, it could be a wise financial decision to get a new mortgage with a shorter life. By making larger payments, you can pay less in interest with fewer years of payment and get to enjoy your full income sooner.
You are going to retire soon
If you are nearing retirement, your income will inevitably decrease as you leave the workforce. In this case, getting a new loan with lower payments can make it easier to pay your mortgage. On the other hand, you can refinance to a shorter loan so that you can become debt-free when you finally reach retirement age.
You have an ARM and rates are increasing
Most adjustable-rate mortgage (ARM) loans begin with a fixed-rate period (typically around 3-7 years) where the interest rate is fixed. After that period, the rate adjusts depending on market conditions. If the interest rates are getting higher each year, you may find yourself paying more in interest.
Refinancing to a fixed-rate mortgage could be an effective way to avoid the increasing interest rates. Watch the trends and refinance your mortgage when rates are at record lows.
You have positive home equity
Find out how much your home is truly worth in today’s market. If it’s substantially higher than when you took out your loan, that means you’ve built up quite a good amount of equity on your home. Refinancing can free up a significant amount of cash that you can use for investments, emergencies, savings, travel, and just about anything else that you want to spend money on.
Your lender is offering lower interest rates
Your lender may be offering lower interest rates today compared to when you got your mortgage. To save money on interest and possibly cash out your built-up equity, ask your lender about refinancing to the mortgage that you qualify for today.
How do you know if your lender is offering lower interest rates? Keep watch on the current market trends. If the rates are getting lower in many parts of your state, it is likely that your lender is following the trend.
Refinancing a mortgage is sometimes done to get out of debt or pay for unexpected expenses. However, refinancing is not only a last resort or a saving grace in case of financial strain. If you notice that the abovementioned signs are true for you, refinancing your mortgage can help you save more money, attain a shorter loan life, and free up equity for other important expenses.