If you’re toying with the idea of refinancing your mortgage, you may be wondering if now is the right time. After all, interest rates are still flirting with historic lows! And who couldn’t use some extra money in their pocket each month from a lower payment? There are four questions you need to consider before signing on the dotted line.
What is your current interest rate?
If you’re suffering under the weight of a hefty five percent loan or worse, refinancing may give you the breathing room you need. Qualifying for a lower interest rate can help you in one of two ways. First, if you are having trouble meeting your payments, a lower rate will decrease your monthly payment. Conversely, if you have no problem with your payment amount, a lower interest rate will allow you to shave years off the end of your mortgage and potentially save you thousands of dollars in interest expense. You can use an amortization calculator to weigh your options with different interest rates.
What type of loan do you have?
If you are currently burdened with an Adjustable Rate Mortgage (ARM), you may find yourself obsessively following the prime rate and sweating out every adjustment. A fixed-rate mortgage gives you a set monthly payment for the life of the loan. Many people switch to a fixed-rate for peace of mind alone, especially if you plan to be in the home for a decade or more.
Do you have equity and could you use it?
If you’ve been in your home for awhile and are carrying credit card debt, why not tap the equity with a refinance and roll all of your obligations into one monthly payment? Not only is mortgage interest cheaper than credit card interest, but it is tax-deductible for many individuals. Combining your debt using equity can be quite a savvy move.
How’s your credit score?
If you bought your home as a fresh graduate with little credit and a lower score, check to see if it has improved. If your score has risen substantially, you may qualify for a lower rate than what you’re paying now.
In short, there is no cookie-cutter answer to when to refinance. Look at the costs of financing and factor how long it will take to recover by dividing the total cost by the monthly savings. Consider all of these factors carefully, and then decide what is right for your personal situation.