Depending on the current terms and conditions of your mortgage — along with your personal finances — you may begin to wonder if refinancing your loan would be in your best interest.
On the surface, a refinance appears to be exactly what you’re looking for. You can lower your rate and save money.
Does it get any better than that?
Before you get too excited, there’s something you need to know: it doesn’t always make sense to refinance your mortgage.
To decide if this is something you should consider or put on the backburner for the time being, here are three details to dive into:
1. Your Current Interest Rate
Generally speaking, if you can lower your interest rate by one percent or more, it’s time to take a closer look at the process and impact on your payment.
Conversely, if you can only refinance for a quarter or half a point, you’re taking on a lot of work for little or no gain.
If you’re on the fence, contact a handful of lenders to inquire about their current refinance rates. You can then compare it to your current rate.
2. Your Future Plans
While not always the case, it doesn’t typically make sense to refinance if you have plans on moving in the near future.
Here’s why: the cost of refinancing may outweigh any savings. So, if you refinance and then sell your home after a few months — or even years — you may come out a lower in the end.
3. Private Mortgage Insurance
If you purchased your home with less than a 20 percent down payment, your lender required you to purchase private mortgage insurance (PMI). You’ll pay this premium until you reach 20 percent equity in your home and have it reassessed by your lender.
If you refinance, you may be able to kill two birds with one stone. Should the lender find that you have the required 20 percent of equity, you’ll no longer need to purchase this coverage.
4. Closing Costs
Just the same as buying a home, there are closing costs associated with a mortgage refinance.
Here’s all you need to know: the money you save as a result of a lower interest rate should be greater than your closing costs.
So, work with your lender to calculate how much you’ll save over the course of your new mortgage. Of course, this takes into consideration the idea that you’ll remain in your home until it’s paid off.
Final Thoughts on Refinancing Your Mortgage
Sometimes, it’s easy to see that refinancing your mortgage is the right decision. Other times, you’ll struggle to determine if it’s worth the time and money.
If you’re interested in refinancing your mortgage, focus on the details above. Once you’re armed with all the necessary information, you can decide what to do next.