Four-Step Guide to Refinancing Your Home Mortgage
Refinancing your home mortgage can be a great way to save some money in the long run. If rates have dropped since you obtained your original loan, you can potentially see a substantial drop in your payments. But there are other reasons you may also want to consider refinancing your home mortgage.
It gives you the option to reach into the equity that’s built up in your home since you purchased it — it’s known as a “cash-out refi.” It lets you take out a new mortgage based on the home’s current worth, pay off what you still owe on the old loan, and pocket the difference, Realtor.com says. You could also shorten the time period that you’ll be making payments, which can be done by swapping your current 30-year mortgage for a 15-year loan or another similar option.
But how do you know when it’s a smart move for you to go through the refinancing process? And when exactly will it start saving you money?
Click through for our guide to help you determine if it’s the right time to refinance.
1. When to consider refinancing
According to USA Today: “Some borrowers can save money when they spot a rate that’s at least half a percentage point lower than their existing rate, experts say. More typically, people tend to move when they see more than a full percentage-point drop.”
ABC News reports that it’s also important to ask yourself this question: How long will it take for your new monthly payment to yield enough savings to make up for the closing costs for the new loan? If you can find a way to keep your closing costs down, refinancing becomes an even smarter option. And you should expect closing costs on refinancing to be even lower, because there is less work for the lender and title company to do.
2. Determine when it will start saving you money
Figuring out how long it will take you to start recouping costs is key. For example, someone who is in their 80s probably shouldn’t spend $4,000 upfront in order to save $50 a month, according to USA Today. Just make sure you’re looking at your costs and how long you plan to stay in your home. If you plan on being there for quite a while, there’s a good chance refinancing is a smart option.
Realtor.com recommends weighing monthly savings against upfront costs. Let’s say you can save $100 a month on your mortgage payment by refinancing but it requires you to pay $2,500 upfront — then you’d need to keep the new loan for at least 25 months to make up the difference. If you’re not going to be in your current house for at least that long, it’s not going to do you any good.
When in doubt, talking to a mortgage broker is always a good idea. They can look at your specific situation and figure out what’s going to be your best move.
3. Where mortgage rates are at
In February, the average rate on a 30-year fixed mortgage was 4.28 percent, which is near historically low levels. A 15-year loan was 3.33 percent, according to Freddie Mac, a mortgage buyer.
These are great rates, but economists aren’t expecting them to stay that low for long, according to USA Today. “Most economists expect home sales and prices to keep rising this year, but at a slower pace,” the publication reports. :They forecast that both will likely rise around 5 percent, down from double-digit gains in 2013.”
This means that if it’s something you’re interested in doing, the sooner the better. As interest rates continue to rise, it’ll save you less money when you do make the move to refinance.
4. Preparing to refinance
You’ve decided refinancing is for you, and so your next step is to start the loan process again. Make sure to get all of your records together and check to see that your credit profile look goods, Realtor.com says: “Your lender will need to verify your income, employment, account balances and the like, so be prepared. The lender will tell you exactly what you need, but generally you’ll be required to produce current pay stubs and savings and checking-account statements.”