Refinancing your home can save you money … but since it also can cost you money, it is important to know when the time is right. Home refinancing—or paying off an existing loan and replacing it with a new one—may provide savings, help to build equity faster, or provide money to make a large purchase. However, since home refinancing costs between 3%-6% of the loan’s principal, and requires an appraisal, title search, and application fees, you should determine your overall goals to decide when the time is right to refinance your home.
- Obtain a lower interest rate—The rule of thumb is that you should refinance your home loan if you can reduce your interest rate by 2% or more. Lenders, however, oftentimes say that a 1% savings is enough of a reason to refinance.
- Shorten the loan term—While reducing your interest rate is the most obvious way to save money when refinancing, shortening the term of your loan can help significantly in reducing the interest payments on your loan. If you are able to secure a lower interest rate, consider also shortening the loan term so that you save interest payments while seeing only a negligible increase in your monthly payment, if any.
- Convert the type of loan—Depending on what type your existing loan is—adjustable rate or fixed rate—converting to the other may be beneficial. Adjustable rate mortgages (ARM) often start out offering lower rates than fixed rate loans, making them more attractive to new homeowners. However, periodic adjustments may result in interest rate increases that make a fixed rate more appealing. Conversely, if interest rates are dropping, converting from a fixed rate to an ARM may make sense.
- Tap into Equity—Many people undertake home refinancing in order to tap into the existing equity on the home to make a large purchase like a home renovation or college education, or to consolidate their debt. This can be helpful, just be cautious to use your equity wisely and not needlessly add years owed on your mortgage.
Refinancing your home can certainly save you money and be a strong move to secure your financial future, if done for the right reasons and in the right way. Priority Mortgage will assist you in the review of your overall financial health and discuss future plans in order to help you make the best decision for you and your family. Contact the Priority Mortgage team today.