The answer to the question, “When is the best time to refinance your home?,” really comes down to the homeowner. Refinancing a mortgage involves paying off your existing loan to replace it with a new product ideally offering better rates and terms.
Trying to determine when is best time is to refinance your home can be difficult to determine. Many factors must be considered including what is going on with your personal finances and also the economy at large.
During the height of the Covid-19 pandemic, mortgage rates were almost half of today’s current market rates. Those conditions made a pandemic era refinance an excellent opportunity for many people due to significantly lower rates. However, even with very low rates, the decision can still be less than cut and dry.
Factors such as whether you can absorb between 3% – 6% of the loan principal in fees that are typical with refinance must be carefully assessed. Read on to explore other factors to consider when you are considering when is the best time to refinance your home.
4 Factors To Determine When Is The Best Time to Refinance Your Home
1. Obtaining a Lower Interest Rate
Depending on when you took out your mortgage, you could end up saving quite a bit of money in interest by refinancing. If you took out the mortgage in the 2000’s – 2010’s, your rates could have ranged from 3.72% -8.06% at a 700+ credit score (or even higher if you had a credit score <700). During the height of the Covid 19 pandemic (June 2020), homeowners and buyers were able to find rates below 3%. Refinancing from a 8% loan 30 year term to 3% loan for the 15 year term results in significant savings for anyone.
A $200,000 loan at 8% over 30 years will cost a homeowner $328,310 in interest with a payment of $1,467.53/month. If you refinance after 15 years (approx. $150,000 still owed and $217,718 already paid in interest) and switch to a 15-year mortgage at 3%, benefits include a new lower monthly payment of $1,035 and reduction of remaining interest payments to $36,457. Total savings of approximately $74,000 will result from this refi deal.
2. Shortening The Term Of Your Mortgage
Some homeowners become more financially stable over time. This allows them to consider paying more monthly towards their mortgage. In this case, lowering rates and shortening the term of the mortgage can be beneficial.
For example, shortening a term from 30 to 15 years can lower the amount of interest that is paid, especially if the switch is made early in the longer term mortgage. A 30 year mortgage at 6% lands the homeowner at $231,676 worth of interest paid while a 15 year term at 6% is only $103,788 worth of interest. Refinancing early could lead to massive savings!
3. Converting Mortgage To A Different Style
Depending on current rates when your mortgage was taken, you may have received a fixed rate mortgage or an adjustable-rate mortgage (ARM). Fixed rate mortgages have an interest rate that stays stable over the life of the loan. This rate is generally slightly higher than an ARM. However, the benefit is a payment amount that remains stable and does not increase when economic trends raise rates.
Some borrowers take advantage of lower ARM’s as they enter into their mortgage product with a plan to refinance if the rates rise above what a fixed rate mortgage can offer. Others adopt the opposite strategy and refinance their higher rate fixed mortgage if ARM rates go down.
Either strategy leaves the homeowner having to keep a close watch on trends and worrying about future changes. To create a scenario where benefits outweigh this added worry, ARM’s are a great option for homeowners who do not plan on staying in the home for more than a few years. The short time frame can make taking advantage of varying interest rates worth it in the end.
4. Refinancing for Home Equity Or To Consolidate Debt
Knowing when is the best time to refinance your home can come down to your current expenses and debt load. Through a refi, homeowners can access home equity to cover major expenses like remodeling or medical emergencies. Refinancing remodeling may be justified if value will be added to the home. In the case of medical emergencies, the interest rate on the mortgage loan could be less than money borrowed from another lender.
Another reason a homeowner may refinance is to consolidate their debt. This should only be done in a financial emergency, especially if the debt in question is high-interest. High interest debt cycles can persist over time, and homeowners in these situations could potentially face bankruptcy. Always research your options before making debt consolidation decisions! The wrong financial product could make your bad situation worse.
So, When Is The Best Time to Refinance Your Home?
Refinancing can be a great financial move, but one that should be made carefully. When and how to do it depends on your unique financial and current loan circumstances as well as larger market forces.
While a refi can lower your mortgage payment, shorten your term, and bring some debt under control, it can also cost you upfront money. As a reminder, refinancing generally costs 3-6% of the loan’s principal, so make sure you are financially sound enough to cover this before making any moves.
As a homeowner you should ultimately be looking for ways to lower your debt while building equity and saving money. Taking cash out of your equity when you refinance generally does not help achieve those goals. Many experts recommend that cash from a refi deal only be used for remodeling/refurbishing the home or in emergencies like medical bills.
If you are not comfortable with terms of refinancing, it might not be the right time. Like any other financial decision, there are ebbs and flows, so you can always wait for when you feel comfortable.
Our skilled agents at Adirondack Premier Properties advise many homeowners and refer them to professionals in the financial sector for help in financing their homes. Contact us today with your refinancing questions and we’ll rely on our extensive real estate network to refer you to a professional who can help.
Knowing when is the best time to refinance your home can be tough, and we have your back with our experience and referral system. Join the many homeowners who have benefited from our expert ADKPP advice and call today 518-523-3333!