Refinancing seems to be on everyone’s mind. In 2020, eight million mortgage refinances took place, according to Freddie Mac.
Check out what our experienced agents have to say about identifying when it’s the right time to refinance your home loan and when you should think twice.
The Right Time to Refinance Your Home Loan
1. You can secure a lower interest rate.
A lower interest rate will help you save money in the long run and help you build equity. Traditionally, a 2% reduction is the threshold to see a return, but Bankrate advises interested homeowners to consider refinancing if they can lower their rate by one-half to three-quarters of a percentage point.
2. You can shorten the loan’s term.
Refinancing your mortgage to a shorter-term loan will save you money on interest payments over time but at the cost of a higher monthly payment.
If you’re financially able to afford the higher monthly payment that comes along with a shorter-term home loan, then refinancing is a smart move for you.
3. You can switch to a fixed-rate mortgage.
A fixed-rate mortgage offers you the security of a steady and predictable monthly payment throughout the term of your loan.
If your adjustable mortgage rate (ARM) is resetting soon, now’s the time to refinance.
When to Think Twice Before Refinancing Your Home Loan
1. You have a low credit score or a high debt-to-income ratio (DTI).
Most lenders will require a credit score of at least 620 to refinance. And, if you’re looking for access to the lowest rates, your score will need to be even higher.
Additionally, mortgage lenders typically won’t approve a loan if your DTI is higher than 43%.
So while it may seem like a good idea to use your home’s equity to pay for home improvements or pay off other debts, it’s not always the best choice. In fact, if your spending and saving habits continuously leave you with debt, refinancing your home mortgage will just perpetuate the debt cycle.
2. You plan to move soon.
If you’re planning to sell your home within the next five years the cost of closing on the refinancing may actually end up costing you more than it saves you.
Still not sure if now is the right time to refinance? Contact us today. We can connect you with one of our trusted lenders.