Deciding when to refinance a mortgage is a complicated decision. It’s more than just trying to get a lower mortgage rate. You must think about your long-term plans. How long are you going to stay in your home? When will your refinancing break even?

When Does It Make the Most Sense to Refinance?

There are certain factors that will influence when it is the right time for you to refinance a mortgage. Something that you may want to consider if you are thinking about refinancing as a result of the COVID-19 outbreak is that lenders are dealing with an increased demand for refinancing while simultaneously managing a smaller staff. As a result, the refinancing process might take longer

Traditionally, a good time to consider refinancing is when mortgage rates fall below your current loan rate. You may have enough equity in your home that you are able to refinance the loan without mortgage insurance, making your monthly payments cheaper.

 Many people refinance with the goal of tapping into their home equity using a cash-out refinance. When your property’s value has increased or there has been a drop in interest rates, you are able to take the difference between the new loan and the appraised value of your home as a “cash-out.” This money could be used to consolidate debt, make home improvements, or care for other financial needs. A bonus is that the proceeds received are tax-free.

What Would Be Considered a Good Mortgage Rate?

Federal Reserve short-term interest rates and mortgage rates are not always synchronized. Just because the Fed lowers interest rates does not mean your mortgage rate will follow suit. 

When looking at mortgage rates, be skeptical about what you see advertised. This is because mortgage rates fluctuate throughout the day, so a published rate, and the rate you receive may not always coincide. The best indicator of your refinance rate is going to be the amount of equity you have in your home and your credit score. A higher credit score coupled with evidence of steady income will increase your chances of getting a competitive refinance rate.

Tradition says that if mortgage rates are one percent lower than what you are currently paying, refinancing might be a good idea. However, when dealing with large financial decisions, the generally agreed-upon way of doing things might not always be right for you. There are some circumstances where a 0.5 percent decrease might be valuable enough to you and refinancing your home makes sense.

 You need to sit down with a mortgage refinance calculator and crunch the real numbers. Take the cost of refinancing, including things like getting a credit check, appraisal, closing costs, and penalties for early payment, and then compare that to your monthly payments after refinancing with a lower interest rate. You will be able to see how much, if anything, refinancing can save you.

 

Do you have 20 percent or more equity? If so, now may be a wonderful time to refinance. If you have over 20 percent equity, you may not need expensive mortgage insurance.

See Things Long Term

How long do you intend on staying in your current home? Will you be starting a family? Will your family be moving out in the next few years? Depending on your answer, you may not be there long enough to see the benefits of refinancing.

If you have already paid off a sizeable chunk of the principal on your home, carefully weigh if refinancing is the right option for you. Remember, interest payments are front-loaded. For the first few years of your mortgage, you are only paying interest. However, the longer you have been paying your mortgage, the more of each of your payments are used for principal.

You should look for a loan term that is the same number of years you have left on your existing mortgage. This may allow you to lower your mortgage rate and reduce your monthly payment. 

There are good reasons to want to consider refinancing your mortgage. The money that you save can be invested and help you build wealth. Equity could be used to improve your home, thereby increasing its value. If you feel that right now is not the best time to refinance, keep working on improving your credit score and making your mortgage payments. When the time is right, you will be in the best position to get the most out of your refinancing.