When should you refinance your home? The rule of the thumb is that you should get refinancing only if your new interest rate is two percent less than your current one. However, deciding whether to go for refinance or not isn’t as simple as that. You need to look at several other things. This includes your financial situation and what you want to get out of refinance. Here, we’re going to discuss the things that make refinance mortgage a sensible decision but before we do that, let’s take a look at the how refinance mortgage works.
How refinance mortgage works
To make a viable decision, knowing how refinance mortgage works is important. Paying off the mortgage you originally got and replacing it with a new one is what refinance loan refers to. The refinance loan may have new interest rate and terms. However, the property remains the same. Obtaining refinance loan is easier than obtaining a regular mortgage because you already own the property. Additionally, refinancing will become easier if you owned the property for a considerable period of time and have significant equity in it. Now that you know how refinancing works, let’s take a look at when you should get a refinance loan.
When should you refinance your home?
Many people find it difficult to determine when they should get refinancing. If you’re such person then you don’t need to sweat because we have all the answers for you. First and foremost, before getting refinancing, you need to consider whether such a move helps you to lower your interest rate and monthly mortgage payments. In case it doesn’t, getting home refinance may not be the best option. On the other hand, if home refinance involves reduced interest rates, you could potentially build up equity in the home faster by getting a shorter-term mortgage loan.
Lowering the interest rate is one of the most common reasons to get home refinance. You should consider such home financing if you’re able to get 2% to 3% lower interest rate than what you’re currently paying. However, you need to keep in mind that this sort of home financing involves paying closing costs and possible extension of loan terms.
Compared to what you’re currently paying each month, you could potentially be paying more with refinancing so doing the math beforehand is important. However, by extending your loan terms, you can use this form of home financing to lower your monthly mortgage. This makes home refinance an affordable option. On the other hand, you can build equity faster by shortening your loan terms. By choosing this option, you can pay off your mortgage sooner and with less interest. Finally, you can use this form of home financing to change your loan type. This means that you can change your loan type from adjustable-rate mortgages (ARMs) to fixed rate mortgages (FRMs) and vice versa.
There you have it—how and when to refinance. Using the aforementioned information, you can determine whether home refinancing is a viable option for you.