Making the decision to refinance your home is a big deal. There are so many factors to consider, interest rates, loan terms, loan types, and so much more. Making the right choice can help you save money in the long run, but refinancing your home at the wrong time can hurt you. It’s a big choice to make, but it can feel overwhelming at times. So if you’re thinking about refinancing your home, here is all the information you’ll need to make the right decision for you.
1. Interest Rates Have Dropped Since You Bought
Most people choose to refinance their homes if interest rates have dropped since they took out their original mortgage. However, interest rates are constantly fluctuating, so making the decision at the right time is crucial. Refinancing is most commonly recommended when interest rates have dropped 0.75% – 1% or more below your current rate. Even just a 1% decrease can lead to significant long-term savings and lower monthly payments for homeowners.
Choosing to refinance and get a lower interest rate on your mortgage can help you reduce your monthly payments and what you’re paying in total interest over time. This is the number one reason why people decide to refinance, so if you’re deciding whether or not you should refinance, keep a close eye on what interest rates look like in your state.
2. Your Credit Score Has Improved
If you took out a mortgage to buy a home when your credit score wasn’t too good, you’re likely paying insanely high interest rates, strict loan requirements, higher monthly payments, and overall costs. Lenders base the terms and costs of a loan heavily on risk, with a bad credit score being a main risk. However, that’s not the end. If you work on improving your credit score, options to refinance are still available.
Even if interest rates haven’t dropped, it doesn’t mean refinancing isn’t an option for you. By improving your credit score to a score that is more acceptable to lenders, you can refinance. By refinancing after improving your credit score, you could potentially get lower borrowing costs and better terms on your mortgage.
3. You’re Ready to Use Your Home’s Equity
Home equity is the value of your home currently minus what you owe on your mortgage. Throughout time, as you’re paying off your mortgage and the value of your home rises, refinancing can be an option if you need extra money in other aspects of your life.
A cash-out refinance is a common way to access cash without selling your home, replacing your current mortgage with a larger loan, in which the difference is paid to you in cash. For example, if your home is worth $500,000 and you owe $250,000, you could refinance and take out a portion of that $250,000 in equity.
Most people use this extra equity for home improvements, major expenses like tuition or medical bills, and to consolidate high-interest debt by using lower-interest-rate mortgage funds. Though a cash-out refinancing can be helpful in those situations, it can also increase your loan balance, term, and total interest and can even use your home as collateral. All factors that are important to consider when debating refinancing.
4. You Want to Change Your Loan Term
At Mortgage of Idaho, we understand that things change. Sometimes your circumstances permit a 30-year mortgage you once took out to be paid in 15 years instead. By doing this, you’re not just modifying your current mortgage; you’re replacing it with a new one. When you want to change the terms of your mortgage, you take out a new mortgage that pays off your existing mortgage completely, and then you begin making payments on the new loan with new terms. You can change it from a 30-year loan to a 15-year loan or vice versa.
Many people do this to pay off their mortgage faster, with less interest paid over time. It also allows you to have lower monthly payments. Though these are all good things, you’ll have to keep in mind that because this is a new loan, it comes with closing costs and another credit and income review. Going this route makes sense if you want to pay off your home faster, lower your monthly payment, your financial situation has changed, or you want more stability. This route might not make sense if you plan to move soon, the closing costs outweigh the benefits, or you’re already far into your current loan.
Why Choose Us?
At Mortgage of Idaho, we’re here to help you go over all your options to decide if refinancing is right for you. If it’s the right decision for you, our team will work hard to make sure the experience is as seamless as possible. Contact us today to learn more about your options or to meet with a lender.
