WRITER | MEG DUNN
Recently, one of the economic bright spots for many Americans has been the drop in mortgage interest rates, leading many to wonder if now is the right time to refinance their mortgage.
When considering a mortgage refi, start with your overall goal. Once that is defined, you’ll know whether refinancing is the right option and what your refinancing terms should look like. Here are five things you might achieve through refinancing:
Lower your monthly payment
By refinancing at a lower interest rate, you could lower your monthly payments. That savings could be used to make additional principal payments, which would help you build equity faster.
Pay off your home sooner
Refinancing gives you an opportunity to reduce the terms of your loan. By refinancing a 30-year mortgage to a 20- or 15-year term, you can pay off your mortgage years sooner. If your budget can handle the potentially higher payments, you could save thousands over the long haul.
Stop paying for private mortgage insurance (PMI)
If you currently pay PMI, refinancing could help you lower your monthly costs by eliminating the need for it, depending upon the equity in your home.
Consolidate high-interest debt
If you have high-interest debt like credits cards or student loans, a cash-out refinance allows you to use your home’s equity to consolidate multiple loans into one low-interest loan, potentially saving you hundreds of dollars every month.
Your home equity could be used for a home renovation. Whether you need an outdoor upgrade or a full kitchen renovation, a cash-out refinance allows you to use your home’s equity to pay for home improvements.
Now that you know how refinancing can help you with your goals, here are a few questions to help you decide if you should move forward with a refi.
What are the closing costs, and how long do you plan on staying in your home?
When refinancing a mortgage, there are closing costs involved, and each lender has different associated fees, ranging from 2-5% of your total loan amount. By dividing your total closing costs by your monthly savings, you’ll know the number of months it will take to break even. If you plan to stay in the home longer than that, then refinancing now could be the right move for you.
Do you have stable employment?
If your employment status changes while you’re going through the refinancing process, it could affect your refinance application’s approval.
How long will the refinancing process take?
The historically low rates are prompting a lot of people to refinance, and lenders are working hard to process the additional volume. The higher-than-normal refinance activity could cause your refi to take longer than usual. Ask your lender how long the process will take so that you have realistic expectations going into it.