(StatePoint) Refinancing a home can be a smart move – if you time it well and understand the factors involved.
Refinancing means replacing your current mortgage with a new one, and doing so will result in a new rate, term and monthly payment. While refinancing does have some upfront costs, taking this step could improve your financial situation.
Reasons to Refinance
Some of the best times to consider refinancing include:
• When mortgage rates are lower than the rate of your current mortgage. Even small differences in mortgage rates can have a big impact on your monthly payment, and the total cost of your loan.
• When your financial situation has improved and you can secure a loan with a shorter term to build equity in your home faster.
• When your adjustable-rate mortgage is adjusting upward and you want to convert to a fixed-rate mortgage for the security of consistent payments.
• When you’ve built up significant equity in your home and could use the money from a cash-out refinance for home improvements or to improve your financial situation. With a cash-out refinance, you’re refinancing your mortgage for more than you currently owe. In return, you’re getting a portion of your equity back in cash.
Key Factors to Consider
Although refinancing your mortgage could save you money in the long and short term, it isn’t free. The total cost to refinance your mortgage will be determined by your lender, credit score and location. As a general rule, you can expect to spend 3-6% of your loan principal on a refinance.
A quick check to see if refinancing makes financial sense for you is to calculate how long it will take to recoup the costs of the refinance. To do this, take the total cost associated with the refinance and divide it by your monthly savings. Note that this model will not work for cash-out refinances or if you are refinancing to reduce the term of your loan.
You’ll also want to consider when you plan to move, and whether you’re going to significantly extend your loan term. For example, if you have 20 years left on your 30-year fixed-rate mortgage and you refinance into a 30-year fixed-rate mortgage, you’ve essentially extended the term of your loan and will pay more interest over the life of the loan as a result.
You should work closely with a lender to discuss options that fit your goals. You can refinance through your existing lender or a new lender. What’s most important is that the lender you choose is trustworthy and offers competitive rates and terms.
Crunch the Numbers
To determine how much it will cost you to refinance your mortgage, and how much money you can save by doing so, lean on free online resources. Freddie Mac’s tools and refinance calculators can help you estimate payments, compare options and ultimately evaluate whether refinancing aligns with your financial goals. Visit My Home by Freddie Mac at myhome.freddiemac.com to access these resources.
When it comes to refinancing, timing is everything. Before taking this step, ensure it’s the right move for you now.
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