Mortgage rates have been steadily declining since a while. With interest rates still around record lows, you might be thinking about refinancing your current mortgage to lower your monthly payments or perhaps get cash for a home improvement project.
After all, you'll have to pay costs and go through the loan approval process all over again. When you refinance, you'll need to set specific goals in order to better your entire financial situation.
Refinancing your mortgage has a number of advantages. You should just know when to refinance a home loan.
What makes you think about refinancing in the first place? It all depends on what you want to achieve. Refinancing is done for a variety of reasons, but here are a few of the most prevalent ones:
You'd like to reduce your monthly payments
If interest rates have reduced since you took out your first loan, you may be eligible to refinance into a lower-interest loan. As a result, your monthly payments may be reduced, and you may pay less throughout the term of your loan. You may check today's rates in seconds to see whether you can save money on your monthly payments.
Alternatively, if interest rates haven't fallen considerably but you've had or expect to have a decrease in income, you may be able to extend your loan term to pay off your debt more slowly. If you go from a 15-year fixed-rate mortgage to a 30-year fixed-rate mortgage, for example, your monthly payments will be cheaper. It's worth noting, though, that you'll have to pay interest for a longer amount of time.
Consolidate debt with a high-interest rate
A cash-out refinance can assist improve your cash flow and save you money in the long run if you have a lot of high-interest debt on credit cards or personal loans, even if you have to assume a slightly higher mortgage rate. The IRS states that if the funds aren't used to "purchase, develop, or significantly improve" your property, you won't be eligible to deduct the mortgage interest you pay on the cash-out amount that exceeds the current loan balance.
Another factor to consider if you're thinking when to refinance home loan is that you're using your house to secure unsecured credit card debt.
To decrease the chance of losing your house, proceed with caution and make sure you can afford your new conditions.
Your credit rating has improved
You may be able to refinance to get a better rate if your credit score has improved significantly. A 20-point boost in your credit score, for example, might lower your rate enough to save you thousands of dollars in interest over the life of the loan, depending on the specifics of the loan.
You may enhance your credit score by paying payments on time, paying off debts, and lowering your overall credit use. It's a good idea to keep track of your credit score on a regular basis so you know where you are and when you might be able to refinance for a better rate.
Is it a wise idea to refinance your home?
If you want to refinance to receive a better rate or term, you need to think about the break-even point: how long it will take you to repay your refinancing costs. If you want to stay in your present house through the break-even threshold, refinancing your mortgage may be a good choice.
The initial costs of refinancing will not outweigh the potential long-term benefits if this is not the case.