When Is the Right Time to Refinance Your Mortgage?
Written by: Alan Donahue
Housing markets, mortgage rates, and different money variables are changing on a daily basis. Refinancing your home is not only a numbers game; it’s about patience and striking at the right opportunity. If you’re unsure about when to refinance your mortgage, you can use this guide to help plan and set goals. Even if you’re not ready to refinance, it’s always good to stay on top of the market. This will enable you to get the most value from mortgage lenders and make an informed decision when the time comes to refinance.
Mortgage Loan Terms
The mortgage that you originally signed up for may not be what you thought it was, or it may not fit your current budget and lifestyle. If you have an adjustable rate mortgage, there is a set period of time in which you’re able to make fixed payments at a low rate. Once those fixed payments have ended, you may find yourself paying more than you expected each month. This is an ideal time to refinance your mortgage and switch to a loan term with fixed rates. A fixed rate is commonly set at 15 or 30 years. The interest rate that you secure in the beginning will remain the same throughout the duration of the loan term. This means that you will have the same payments every month, and you can budget and plan more easily. By comparing rates from lenders, you can choose the lowest rate and save even more money on your loan.
The job and career that you had when you first purchased the home may be vastly different than the one you have now. If you’re making more money, you may have the ability to put more toward your mortgage and pay off the home in a shorter amount of time. For example, you may currently have a 30-year fixed rate mortgage. By refinancing into a 15-year fixed rate mortgage, you can get lower interest rates and pay off your home in half the time. Evaluate your job stability, current salary, and any anticipated salary increases to decide if refinancing works for you.
Major family changes can have a dramatic impact on your financial situation. If you’re in the process of getting divorced or your partner has passed away, your once-affordable mortgage payments may be difficult to make each month. By refinancing and obtaining a new agreement, you have the ability to lower your monthly payments and make them fit within your budget. Transitioning to a single budget can be made a lot easier by lessening the burden of your monthly mortgage.
If you’ve recently come into a large sum of money, you may want to use that cash to help pay off a home mortgage. By refinancing, you can set up a term that allows you to get the home paid off in a short period. Along with the 15-year fixed rate loan, you can choose an even shorter term known as a balloon payment. A balloon payment features several years of fixed payments until a final end date is set. The end date includes a large payment amount for the remaining principal owed on the house. With this refinancing option, your home can be fully paid off in five to seven years.
Your equity is the market value of your home minus the amount you still owe, and it naturally increases with each payment that you make. The equity can also increase with the appraised value of your home. There are several factors that can impact the value of your home. Other home sales in the area, home improvements, and changes in the housing market are just a few of the factors that can increase your equity. If your equity has recently increased, it may be a good time to apply for a cash-out refinance loan. This type of loan will pay you extra based on the equity you have available.
A home may have been purchased at $300,000. If you put $50,000 down and have paid another $50,000 toward the mortgage, the remaining balance of the home would be at $100,000. Following an appraisal, the home may now be valued at $400,000. This allows you to get a cash-out refinancing loan of up to $200,000 -- $100,000 from payments you made and another $100,000 for the increased equity value. You do not need to obtain the full $200,000 as a cash-out option; you can select any amount that you need for your current situation. The loaned money will be added to your overall principal and applied to your monthly mortgage payments.
Choosing the right time to refinance your home could end up saving you thousands of dollars.
Check out various refinancing lenders and be fully prepared when the timing is right for your home and situation.
About Alan Donahue
Alan Donahue has written on an array of expert topics, including home mortgages. His studies at the Academy of Art University also focused on home budgeting. His work has been published on Yahoo!, Chron, Intel, and various home content blogs. He also has a strong passion for films and it's merely a coincidence that one of his favorites is “Home Alone”.
“Home is Family & The First Step in Buying Homes is a Mortgage, so Choose Yours Carefully”