Refinancing a mortgage can be a wonderfully beneficial opportunity but only if you do it right. One extremely important aspect of this financial decision is timing. But if you’re not a mortgage expert, how are you supposed to know when the time is right? We’re here to help with that. Read on for expert advice about the best time to consider a mortgage refinance loan.
Why Do Other Homeowners Refinance Their Mortgages?Let’s start with the motivation behind this financial decision. While no two financial situations are exactly alike, there are common reasons for refinancing mortgages.
- To start, you could refinance to change the term of your mortgage. For instance, a common reason is to switch to a shorter or longer mortgage term.
- Others use it as an opportunity to switch to a lower interest rate. That saves money with lower monthly payments.
- The third reason is to switch the type of mortgage from a fixed to an adjustable rate, or vice versa. Each type has its pros and cons, so refinancing is an opportunity to switch to whichever is best for your financial situation. For instance, some who signed up for an adjustable-rate mortgage may find that they actually prefer the stability a fixed rate provides.
Aside from adjusting the mortgage itself, another common reason to refinance is to do a cash-out refinance and use the extra funds received in cash toward a financial goal. In this case, you dip into the equity you’ve built up in your home over the years. This option works similarly to a home equity loan or a home equity line of credit. What are some reasons to tap into your equity with a cash-out refinance?
- To pay off debts
- To put back into the house and cover costs of home remodeling and improvement, whether or not you intend to sell
- To fund major costs like college tuition and other education fees or medical expenses
There are no hard and fast rules for what you can do with this loan so you can use the money however you feel it would be best used.
When Are Some Good Times to Refinance a Mortgage?Certain circumstances can make refinancing more appropriate. The following could be great opportunities to benefit from refinancing your mortgage:
- You can refinance to switch from an adjustable-rate-mortgage (ARM) to a fixed-rate mortgage before your ARM introductory period ends and secure a fixed interest rate.
- When you own 20 percent equity in your home, most lenders no longer require you to pay for private mortgage insurance (PMI).
- One of the best reasons to refinance is when you know you can get lower interest rates and save on monthly payments. This is why you should research the market and its current rates before starting the loan application process.
- If you’ve improved your credit score and debt-to-income (DTI) ratio in the time since you initially set up the mortgage, you may be eligible for a better interest rate. If you have the opportunity to get lower interest rates and better loan terms, consider taking it. The exact numbers vary, but to get the best mortgage loans, your credit score should be 780 or more. And your DTI should be 40 percent or less.
- When you know you can pay off the mortgage more quickly, it can be smart to refinance to switch to a shorter loan term. A common reason people might do so is if they’ve had a significant income increase since initially setting up the loan.
Refinancing your mortgage isn’t right for everyone all the time. Here are a few situations where you might want to wait to refinance or even put it off indefinitely:
- If your mortgage comes with a prepayment penalty, it may not be worth it. This means you’ll be charged more for paying the loan off too early. The same goes for if you refinance too early. If your loan is in its first year, it may be best to wait.
- If you’re considering a cash-out refinance, you must wait to build up enough equity. You usually need at least 20 percent equity in your home to be eligible for a cash-out refinance.
- The higher your credit score, the better. If your credit score isn’t great, try to build it up before applying for a refinance. You can do this by paying off credit cards and debts. The same goes for your DTI ratio.
- If you’re refinancing to get a lower interest rate, the best time to switch depends on the market.
You should always do your research and seriously consider any risks before refinancing your mortgage loan. Under the worst circumstances, you could lose your home, so you want to be prepared.
What Other Important Questions Should I Consider?Even if the time seems right, you need to determine if refinancing your mortgage is worth it. Here are a few things to consider:
- How many years are left of your mortgage? Again, if it’s only the first few years you’ve had a mortgage, you may want to wait, if only to avoid a prepayment penalty.
- How many years would you be adding to the mortgage? If refinancing means extending the length of your loan, you could end up paying more in interest overall. Crunch the numbers and talk to your lender to decide if the long-term increase in costs is worth it. It still might be.
- How much longer are you planning to reside in this home? If you’re planning to sell soon, setting up a whole new mortgage on your current house and paying for closing costs probably isn’t worth it.
- Are there more effective ways of reaching your financial goals than to take out a refinance mortgage loan? For example, a home equity loan could be a more effective way to access your home equity if that’s your goal.
The exact time depends on specific circumstances as well as your lender. But the process usually won’t take longer than two months.
Is now a good time to refinance your mortgage? For help with your decision, discuss mortgage refinance loans with our experts at Capital Credit Union. You can easily schedule an appointment through our website.
Our credit union has looked out for the financial well-being of northeast Wisconsin residents since the 1930s. You can trust that we’re the experts to advise you about mortgage refinancing. And explore our website to see how else we give back to our community. If you’re not a member yet, apply online to join Capital CU today.
Capital Credit Union is an Equal Housing Opportunity Lender