5 Signs It's Time to Refinance Your Mortgage
by Matt Frankel, CFP | Dec. 3, 2018
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Mortgage interest rates have gone up significantly over the past year or so but remain at historically low levels. Therefore, in many cases, refinancing your mortgage can still be a smart financial move. With that in mind, here are five common cases where it could be a good idea to explore your mortgage refinancing options now.
1. Your interest rate is about to adjust
If you have an adjustable-rate mortgage, or ARM, chances are that your rate has gone up over the past year or two. Or, if you’re still in your initial “teaser” rate period, you could be looking at a big rate increase when it’s over. Adjustable rate mortgages are tied to a certain benchmark interest rate, and since the Federal Reserve has raised interest rates several times recently (and is expected to continue doing so), your adjustable-rate mortgage could start to get much more expensive.
Fortunately, mortgage rates haven’t exactly risen as much as the Federal Reserve rate hikes might lead you to believe. The national average 30-year fixed rate mortgage APR is still about 4.7%, so if you have an adjustable-rate mortgage, now could be a smart time to refinance.
2. You need cash and want a low-interest way to get it
If you have a substantial amount of equity in your home, refinancing your mortgage to cash some of it out could be the lowest-cost way to obtain funding for renovations or to pay off high-interest credit card debt.
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Let’s say that you want to renovate your kitchen and that you plan to spend $30,000. You have a few options. You can use credit cards to pay for it, but the average credit card APR is nearly 17%. You can obtain a personal loan, but the best APR buyers with top-notch credit are offered is currently about 7.5%. Even home-equity loans or lines of credit have average interest rates of 5.79% and 6.24%, respectively, as of this writing.
Meanwhile, borrowers with good credit should have no trouble obtaining a refinancing mortgage with an APR of under 5%. In short, refinancing can be your cheapest way of funding a major expense, so it could be a smart idea to take advantage.
3. Your credit has improved since you got your mortgage
You don’t need great credit to obtain a mortgage, but it can help you save lots of money over the term of the loan. And, you might be surprised at the difference a seemingly small improvement in your FICO® Score can make.
Based on today’s national averages, a consumer with a 670 FICO® Score can expect a monthly payment of $1,058 on a 30-year $200,000 fixed-rate conventional mortgage. With a 690, this drops to $1,032. Now, this may not sound like a big difference, but over 30 years it translates to $9,360 in savings. So, if your credit has improved since you obtained your mortgage, it can be a smart decision to refinance if your interest rate would be significantly lower.
4. Your monthly payment is too high
One good reason to refinance is if you have paid down a significant amount of your principal balance and your monthly payment has become too much of a burden.
For example, let’s say that you obtained a $200,000 30-year fixed-rate mortgage eight years ago with a 4.5% interest rate. Your monthly payment (P+I) would be $1,013 and you would still owe about $169,600 on the loan.
If you were to refinance your remaining balance into a new 30-year loan at the same 4.5% interest rate, it would lower your monthly principal and interest payment to $859. The downside is that you’d be re-starting the clock until your mortgage is paid off, but if the priority is lowering your monthly payment, it could be a smart financial decision.
5. You want a shorter loan term
Consider this common scenario: You bought a home several years ago and obtained a 30-year mortgage in order to keep your monthly payment as low as possible. Since that time, your income has increased, you can afford a significantly higher payment, and want to pay your mortgage off faster.
You have two basic options here. First, you can keep your current mortgage and add more money to each of your payments. This will certainly achieve your goal of a faster payoff.
However, it could be smarter to consider the second option -- refinancing into a 15-year mortgage. Specifically, a 15-year mortgage may have a significantly lower interest rate than your 30-year loan, so more of your monthly payment will be applied to the principal, not to interest. Just for context, the current national average 30-year mortgage rate is 4.26% for consumers in the top credit tier. For a 15-year mortgage, it’s 3.73%.
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