Is Now a Good Time to Refinance Your Home Loan?

If you’re like most people, your home is the single biggest asset that you own.  That probably means that the home loan you have for that particular asset is the biggest bill you have to pay every month.  Even if that mortgage hasn’t become a problem, it’s very likely that you’re wasting thousands of dollars a year in extraneous interest and other charges.  By refinancing your home loan, however, it’s possible to save a lot of money while also reducing your monthly payment and shortening the length of time it takes to pay off your loan entirely.

Before deciding whether or not to refinance your home loan, however, it’s important to consider your personal financial situation as well as the conditions of the economy.  Be sure to ask these questions before you decide to refinance your mortgage.

What Is My Interest Rate?

The past few years have brought record low-interest rates to the mortgage market.  In many cases, that means that if you have an older home loan, you could save several points off your rate when you go to refinance.  However, if your mortgage is fairly recent, it’s important to look carefully at the interest rate that is currently being offered.  As interest rates are starting to creep back up, it’s possible that refinancing will give you a higher rate than what you have right now.

Of course, your interest rate is determined by a lot of factors beyond the current market conditions.  If you have recently seen an improvement in credit score, for example, you will likely qualify for a lower rate than what you have on your original mortgage.

Do You Want a Lower Payment, the Ability to Pay Off Your Mortgage Faster, or Cash to Spend?

If you have any home equity, it’s likely that you will need to decide whether or not to pull it out of your loan.  If you simply refinance the remaining balance of your loan, you can choose to extend your payment term (giving yourself smaller monthly payments), or use your lower interest rate to shrink the amount of time it will take to pay the mortgage off (since more of your money will be going to pay down the principal each month).

With careful research, however, it’s very possible that refinancing your home loan will allow you to do all three.  If you find the right loan, you’ll be able to use a portion of your home equity for immediate expenses.  Then refinance the remaining balance at a  lower interest rate and a longer payment term in order to reduce your monthly payments.  As you make more money, or your financial situation improves, make additional payments on the loan to pay it off earlier.

It’s critical to decide what you want out of a home loan refinance before you actually sign off.  The total amount that needs to be underwritten is critical to determining the payment terms of the new loan.  If you change your mind throughout the home loan process, it could wind up costing you a lot in fees.  If you’re not sure how much money to pull out, ask about a HELOC, which will allow you to adjust the amount of money you can borrow over time.

What Fees Am I Paying?

If you didn’t have a high enough down payment when you first purchased your home, there’s a good chance that you are paying PMI on your mortgage.  Depending on your exact circumstances, this means that you may be paying hundreds of dollars a year for insurance that doesn’t even protect you.  Fortunately, once you have about 20% of your home value paid off, you qualify to have this coverage removed from your mortgage.  This can apply to the original value of your home (what you paid) or the home’s current value.  That means that if homes in your neighborhood have increased in price, you may qualify to have this fee removed.

Besides canceling PMI, it’s also important to check to see if you are paying any other fees.  Other types of mortgage insurance or finance fees can really add up.  In some cases, simply canceling the fees of your current mortgage can lower your payment significantly, even if you don’t qualify for a lower interest rate. 

After you’ve considered all these factors and determined how much you could save by refinancing your mortgage, then it’s time to start looking seriously at a new mortgage.  As interest rates are starting to creep up, it’s important to keep in mind that you need to make a decision on your new loan before the banks decide it’s time to raise rates again.

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