Adjusting your mortgage can help you save money or reduce your interest rate. As well, it can help you build equity in your home faster.
Getting a better rate or lower payment on your mortgage can be an attractive reason to refinance your mortgage. However, even if interest rates are low, is it always a good time to refinance? Here are some things to know before you renew.
Good Reasons to Refinance
The following are the best reasons to seek a refinance of your mortgage:
- It will lower your monthly mortgage payments
- You will build up more equity
- You can pay off your mortgage faster
- Get a better interest rate and save money over the long term
- Stop paying mortgage insurance if you have built up over 20% equity in your home
- You can change lenders
What to Know Before You Refinance
If you have a good reason to refinance, there are still some things you should know before going through the process. These include:
- It may cost you. Depending on the terms of your mortgage, you may have to pay a fee to refinance your mortgage early. However, it is worth calculating just how much this will be, as the money you save by refinancing may be more than you’ll have to pay. According to Investopedia, most refinances cost between 2%-5% of a loan’s principal.
- Extra fees. You should also be ready to pay some other extra costs that come with refinancing a mortgage, including closing costs. While you may be able to roll these into the new mortgage, it is important to calculate whether you will save or lose money in the long run.
- Interest rate. If you are looking to save money on your mortgage and get a lower interest rate, the best rule of thumb is to aim for 2% lower than what you are already paying. However, even if you can get the interest rate adjusted to 1% lower, it still may be worth it.
- How long will you live in your home? Consider how long you plan to stay in your home. If you think that you will be moving sooner rather than later, then refinancing may not be the best decision. Because it can take months or even years to see the savings from a refinance, if you sell your home before that time, you’ll miss out on the savings.
- Qualification. Not every homeowner meets the criteria for refinancing. It depends on your home equity, income, and credit. A lender will want to see that the property is worth more than the current balance on the mortgage. They will also want to be sure you can make the monthly payments.
Refinancing is a big decision, and it is not right for all homeowners. So, even if it seems like everyone is telling you to do it, consider your options and goals before you decide.