Is It Time To Refinance Your Home

Is It Time To Refinance Your Home

If refinancing your mortgage will save you money or make it simpler to pay your monthly bills, it might be a good decision. 

According to some experts, refinancing should only be done when it would result in a cheaper interest rate, a shorter loan term, or both—but they aren’t the only benefits. For instance, even if it means starting over with a brand-new 30-year loan, you could get temporary relief with a lower monthly payment. You may be able to access your home’s equity through refinancing, or you may be able to get rid of an FHA-backed loan and the associated mortgage insurance payments.

Why Refinance A Home?

According to sources, the current average mortgage rate for a 30-year fixed-rate loan is 4.99%. If you can lower your current interest rate by at least 0.5%, it may be worthwhile to consider refinancing your mortgage. 

For example, if you refinance a new 30-year loan with a $300,000 mortgage amount and your interest rate drops from 6% to 5.50%, you will save around $95 a month or $1,140 a year. Your savings would be $188 per month or $2,256 annually if you could lower the rate from 6% to 5%.

Furthermore, you’re not required to refinance into a 30-year loan. You can convert a 30-year loan into a 15-year fixed-rate mortgage if your financial situation has improved and you can afford more significant monthly payments. This will enable you to pay off the loan more quickly and at a lower interest rate. 

Closing expenses may range from 3% to 6% of the amount of the loan being refinanced. You may calculate your breakeven point by dividing your closing costs by the amount you will save each month. 

The number of months it will take you to start saving money and recover the refinance cost is the outcome. Refinancing your mortgage makes the most sense when the time to break even is short. For example, if you refinance into another 30-year loan after ten years of a 30-year mortgage, you’ll be paying a mortgage for 40 years rather than 30.

It makes sense to refinance into another 30-mortgage if your main goal is to lower your monthly payment. As long as you can afford the increased monthly payments, refinancing a 30-year mortgage into a 15-year one can be the preferable choice if your goal is to save on interest and shorten the time. 

When To Consider Refinancing? 

When considering whether to refinance your mortgage, you should take into account the following factors: 

  • Credit Ratings

To be eligible for a mortgage refinance with most mortgage providers, your credit score must be at least 620. You must have a 740 to receive the best mortgage rate. Also, remember that you might not be eligible for as good of a rate if your credit is worse than it was when you obtained your present mortgage

  • Debt to income (DTI) 

Some lenders may deal with a DTI as high as 43% for conventional loans. The maximum DTI that FHA loans would typically approve is 50%. However, lower is usually preferable. 

  • How long do you intend to remain

Closing expenses are a cost you’ll incur while refinancing. You might not turn a profit if you intend to leave soon. 

  • What percentage of your home’s value is equity

You need at least 20% equity in your house to qualify for a mortgage refinance.

Final Thoughts.

The main thing to remember is there is no rush. Waiting a few years for your credit or financial situation to improve before refinancing can save you thousands throughout the loan.

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