when to refinance your home

With mortgage rates hovering around 2.5-3.5% over the past year, refinancing for a tax deduction or to kick start some home improvement projects is something to take advantage of!

If you have a mortgage, you might have heard the term refinancing. It is very common among individuals who regularly invest in real estate. In contrast, others hardly have an insight into the term and the program offered by banks and other credit institutions. Many believe that refinancing can be profitable for fall. But that is not the case. Refinancing is a choice that individuals need to make based on their financial situation, type, amount of mortgage, and various other factors. It might end up being profitable, or it might cost you more, depending on your situation. If you are planning on refinancing, you need to get your facts straight. In this article, we will be discussing refinancing it in detail, what it is, why you should opt for it, and when should you refinance. So continue reading to find out whether it is the best option for you or not.

What Is Refinancing?

The term itself is self-explanatory. In simple terms, it means to pay off your existing loan by replacing it with another loan with better financial terms. It is a simple way to help reduce your financial burden resulting from heavy mortgage payments.

There are multiple reasons why individuals opt for refinancing, and here are a few of the major ones;

  1. To get a lower interest rate
  2. To shorten the existing mortgage term
  3. To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa
  4. To tap into home equity in order to raise funds to meet your financial needs or an emergency.
  5. To consolidate debt

Sounds tempting, right? Well, it is but at the same time it isn’t the best choice for all. Therefore, jumping blindly into it isn’t the answer to your financial troubles. Make sure to understand all the major elements of refinancing and evaluate whether it would be a best choice for you or not. You can also hire a professional for advice if you believe you need help.

When To Refinance Your Home?

The major question is, when should you refinance your home? Well, when opting for the refinancing option, you need to consider several factors before you make the shift—it all about calculations and profit. If refinancing options help you lower your mortgage and monthly payments, then it is a suitable solution for you, but if not, then you might need to stick to your current plan. As said, there are  number of elements that you need to consider beforehand. Here is the list of the most important factors that you need to consider to figure out whether it is the right time for you to shift to refinancing.

1-     Interest Rate 

The very first thing that you need to consider is the interest rate. It is a major factor that affects your overall debt amount and monthly payments. At present, interest rates have fallen drastically due to the on-going pandemic. Here is the list of the current lowest mortgage rates you can opt for;

These have drastically decreased from 4.5 and 5.5% as compared to last year, which makes now one of the best times for individuals to opt for a fixed interest rate on their refinancing. Traditionally, interest rates fall by 1 to 2% only, whereas in this case, they have fallen by 3 to 4%, which makes a huge difference. This is a major incentive to refinance at present.

2-     Loan Term

When refinancing, homeowners can opt for a shorter-term period due to the lower interest rate, with only a slight change in the monthly payment. For instance, if you have a fixed mortgage for 30 years with an interest rate of 9% and you shift to refinancing and get the 5.5 interest rate, then your monthly payment will shift from $805 to $817 terms of monthly payment if you cut the term period to 15 years only.

But on the other hand, if there is a slight change in your interest rate and yet to still opt for a short-term period, thus you might end up paying double the amount every month. So, depending on the interest rate and your financial stability, you can opt for a shorter-term period to get done with the debt fast.

3-     ARM to Fixed Rate

Initially, when homeowners get their mortgage plans, they mostly go with ARM as it is often less than the fixed interest rate. But as time passes, ARM tends to increase, which leads to higher monthly payments. If your ARM has increased significantly compared to the initial days, you should shift to refinancing to enjoy lower fixed interest rates at present.

4-     Your Personal Financial Position 

Lastly, you need to consider your financial position. Mostly individuals shit from renting to owning in their last 20s or 30s. You might have a bad credit score at that time, which can lead to a higher interest rate. But with time, as you learn to manage your expenses and debt better, you will be in a better financial position. Thus, that can help you get all your debt sorted out with refinancing and get a lower interest rate.

Takeaways

After considering all the factors and your personal financial position, you can opt for refinancing if it turns out to be profitable for you. If not, then stay away from it and stick to your current mortgage plan as it might be the best option for you.  Furthermore, you can keep an eye on the interest rates, and as soon as they fall, you can opt for refinancing again to analyze whether it would be the best option for you. At present they are drastically low because on the on-going pandemic which makes present one of the best times to refinance your home. So start exploring your options to reduce your monthly mortgage payments.

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Felicity Nicole
Felicity Nicole
Owner , She Is You
I’m Felicity Nicole, and I was born and raised in the Chicagoland area. A tomboy at heart, I can be found hair up, favorite sweatshirt on, cooking up something yummy for my family. I am remarried to a wonderful man who totally gets me (woohoo!)., It turns out God does give us second chances! I am now a stepmom to two adult children who are super beautiful and a nonstop blessing in my life. Watching my son play baseball is by far my greatest joy. I am a transformational coach and Reiki Practitioner on a mission to help women redesign their lives. This mission comes directly from my own personal experience with self-discovery. From an abusive marriage to a healthy, fulfilling relationship, through multiple careers and a lifetime of coaching the women in my own life, what I realized is that I have always had power and tenacity deep within me…I just needed to let it thrive again. My courage and determination to walk away into the unknown and redesign my own story is a shining example that where there’s a will there’s a way. On the lighter side, I like my pizza thick and layered in meat and cheese (remember, I’m from Chicago). I spent 22 years in the veterinary field, where I brought home WAY too many fur babies. And if I had one thing to bring with me to a desert island, it would be coffee.
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