If you’re considering refinancing your home, you might be wondering about timing. When is the best time to refinance your mortgage? The answer largely depends on your goals. Here are a few of the most common reasons for refinancing a mortgage.
Refinancing your home is a large decision and there are many reasons that you may want to skip this transaction. Here are a few to consider.
You’re planning to move soon. Refinancing a mortgage costs around 2% to 5% of the total loan amount in closing cost. Reaching a break-even point takes time. For example, let’s say that you pay $3,000 in closing cost and your payment drops by $50 a month. Breaking even will take around 60 months, so if you plan to move before then, consider skipping the refinance.
Tapping into equity for short term gains. Funding a home improvement or consolidating debt are common reasons that people tap into their equity. But when tapping into equity, it’s important to ensure that leveraging your equity is providing long-term financial gains.
Refinancing into a longer-loan term. A refinance can result in you paying longer on your mortgage and consequently paying more interest. Let’s say you have 20 years left on your existing mortgage and refinance into a 30-year mortgage. This saves you money each month but adds another 10 years to the life of your current loan. Consider refinancing into the shortest-term home loan that you can afford.
A penalty exists on your existing mortgage. If your existing loan has a prepayment penalty, you might lose any potential financial gains if you refinance. For example, the lender may charge a 2% fee if the loan is paid off in the first year. Get in touch with your lender to determine if a prepayment penalty exists on your mortgage.
Refinancing a fixed-rate loan into an adjustable rate mortgage. An ARM has a fixed interest rate for a short period of time. For example, a loan might have a lower interest rate for the first five years but adjust after that period. This can make a future mortgage payment unpredictable and potentially higher. Therefore, refinancing your fixed-rate loan into an ARM to lower the mortgage payment in the short term might not always be best if you plan to stay in your home.
If you’re ready to refinance your home, you might wonder about next steps. The process is similar to a home purchase and typically requires proof of income, financial documents and an appraisal of your home. Most lenders will require the following with home refinances:
Refinancing your home is a personal decision that includes a variety of variables. Are you planning to move in the next five years? Do you plan to stay in your home until you pay it off? And what is the ultimate goal of your mortgage refinance? Working out different scenarios using a refinance calculator, such as refinancing into a 15-year versus 30-year loan term, can help you figure out the best path forward.