Most homeowners refinance their home mortgage when interest rates have dropped. The question is how much lower does it have to go to justify a refinance?
Purchasing your a home in the last few years was certainly an experience you’ll remember with tight inventory and multiple offers. A lot of people locked in an interest rate they felt was good in 2019. Then mid-2020 interest rates dropped further during the pandemic.
However, as of February 2022, interest rates have increased considerably. Should you refinance now before the anticipated 5-6 rate hikes by the Federal Reserve in 2022. Keep reading to find out the most popular reasons to refinance your mortgage.
Interest Rates Have Fallen
Most homeowners who refinance do so in order to save a substantial amount of money each month if they get a mortgage with an interest rate that is lower by .75% or more. Think about it. Many people do a balance transfer from one credit card to another for a lower interest rate. This is essentially a refinance. Even student loans are refinanced for better terms. However, the rate needs to be low enough to offset any costs.
Remember you may not want to refinance to a 30-year fixed if you’ve been paying on your existing loan for 5-10 years. If you do it will add five to ten years and extend your loan term. In this case, you may want to consider a 20- or 25-year mortgage loan or even a second mortgage or HELOC. Alternatively, you could get a 30-year fixed loan but make payments based on a 25-year amortization.
Your Credit Score Is Higher Now
This is a really good reason to refinance your mortgage because you could be eligible for the very best interest rate mortgage and terms. Lenders regard your middle FICO credit score as one of the most important elements that determines the rate. In general, the higher your FICO® credit score, the lower the rate.
To get a rough idea of what your credit score is use credit score apps and websites. The best place to get your credit score is MyFICO.com or your auto insurance company. The others, such as CreditKarma or through your credit card tend to be off from what the lender will pull.
Your Home JHas Increased in Value
If the value of your home increased, you may qualify to get cash-out and take advantage of a lower rate. A cash-out refinance loan may be a great option instead of a home equity loan because you will have one loan to payoff your existing mortgage, get a lower rate and get some back after closing.
If your home’s value has appreciated it could allow you to refinance for a higher amount than the existing balance of your mortgage. The difference (new loan – existing loan) can be used to pay-off high interest consumer debts like credit cards or personal loans.
Switching from an ARM to a Fixed Rate Mortgage
Some homeowners look into a refinance for assurance. If you have an 5- or 7-year fixed adjustable rate mortgage (ARM), it might be a very smart decision to refinance into a fixed rate mortgage if you think interest rates are going to go up. Some 30-year fixed mortgages are the same or lower than 5-year ARMs a few years ago.
With an ARM, your rate may increase once the 5-7 fixed-rate period ends, over and above what the payment is for a fixed rate mortgage. This switch offers you peace of mind that you will be able to afford the monthly payments.
Paying for college costs
If your kid didn’t get a scholarship for college, the big tuition costs and burden can become alarming. The stress for you and your teen may make their higher education opportunity uncertain. On the other hand, if you have sufficient equity in your home, refinancing just might help pay for college and lessen concerns about them finishing college due to the costs.
Everyone’s situation is different, but depending on various factors your new monthly payment could turn out to be close to what you’re currently paying. This may very well be a better option that having your kid go into debt with burdensome student loans. Moreover, there could be tax advantages you can use after speaking with a tax professional.
Conclusion
The choice to refinance your mortgage may enable you to get a better mortgage rate that may offer a lower monthly payment. If you are thinking about refinancing your mortgage, work with a trusted mortgage lender to get the best financial advice and answers to your questions.
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