You might have heard people asking, “Should I refinance my home now?” You might wonder if you should actually think about the same thing yourself. With interest rates still being at near historic lows, and home prices back near all time highs, it can make a lot of sense for some people to refinance their home.
Refinancing could lower your monthly mortgage payment, or it could allow you to take out some cash via the equity you have in your home. However, there are costs and fees associated with refinancing – it’s not free. As such, you need to make sure that refinancing makes sense before you go about it.
Read on to see if you actually should refinance your home.
What Does It Mean To Refinance Your Home?
First, refinancing your mortgage is process of replacing your existing mortgage loan with an absolutely new one. The new loan may come from either the same company that provided your existing mortgage or a different company. There are a lot of reasons why you should refinance your home. Basically, you will save money and you can pay your mortgage off in a shorter period of time.
If you were stuck with no choice but to get a home mortgage loan that has a high interest rate, now is the best time to have your home mortgage refinanced. Refinancing a mortgage can lower the interest rate that you are paying (since rates are most likely lower now than when you originated your mortgage). This would create a savings for you as the homeowner.
However, for you to get the most out of your home refinancing, you should have already decided to stay in the home that you are to refinance for a long time (usually a period of about 3-5 years). Generally, your plan should be to stay in your house long enough to realize the savings that home refinancing ought to offer you, and cover the cost of any fees involved.
What To Consider When Thinking “Should I Refinance My Home”?
When you find yourself thinking, “I should refinance my home,” there are a few things that you should consider. Below is a checklist of the things that you should ask yourself or the mortgage provider if you are decided on getting your home refinanced now.
1. How many years more or how long do you plan to stay in your house?
If this house is one that you are planning to spend the rest of your life in, then refinancing it would make a lot of sense. Otherwise, if you are planning to move out soon, refinancing would just prove to be a waste of money, time, and effort. The average payback period on a home refinance is several years, but depending on the deal you get, it could be shorter or longer. To calculate out your payback period, you just take the closing costs and divide it by the monthly savings. So, if your refinance saves you $200 per month, and the closing costs of your new loan are $2,000, your payback period would be $2,000 / $200 = 10 months.
2. How low will the interest go down to?
If you are paying a significantly high interest rate for your current mortgage (5.5%+), then refinancing could offer a great opportunity to lower it dramatically. Since the main goal that you should look into when you choose to refinance is to lower the interest that you are paying, it would not make sense to get another mortgage without the lowest interest possible. If you can lower the interest rates by at least a percent, then you should consider refinancing.
3. Does your current mortgage have an adjustable rate?
If you have an adjustable rate mortgage, home refinancing is a way to secure a fixed mortgage payment. It also allows you to have predictable monthly interest rates and payments. As of now, 30-year fixed home mortgage rates are being offered at very low rates. Thus, if you have an adjustable mortgage, although your rate may be low now, you could lock in this low rate for years to come. I doubt that rates will stay this low for the entire term of your mortgage.
If your situation falls under these main considerations when it comes to home refinancing, then you should answer “yes” to the question, “Should I refinance my home now?”
Where To Refinance
Beyond the question of whether you should refinance or not, it can be hard to know where yo go about getting a mortgage refinance loan. Analysis paralysis can set in, and you might not feel comfortable taking action to lower your monthly payments.
If you’re okay with a more traditional route, check out Lending Tree to compare your options, or look at the table below and see where you can find the best rates and fees:
Refinancing can make a lot of sense, as long as you know what you’re going to pay in fees. For example, I recently refinanced my mortgage and it cost about $3,000 in closing costs. However, it lowered my monthly payment from $2,000 to $1,700 per month – saving me almost $300 per month that was going to interest. That means my payback period is just 10 months, and I’ll see a bunch of savings!
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.