When interest rates drop, you might hear friends and neighbors talk about scrambling to “refi” their mortgages for better rates and lower payments. For the most part, any drop in interest rate is good. However, there are a few important considerations to determine the best time to refinance your home, depending on your situation.
Consider Your Motives
Dropping interest rates are often the top reason for refinancing your home, but that is not the only reason. Think about your goals, and ensure that refinancing will meet them. Other common reasons for refinancing include:
- Getting lower monthly payments
- Paying off your mortgage early
- Eliminating mortgage insurance
- Saving money
- Lowering interest
- Increasing principal payments
- Obtaining a better loan
- Having more predictable payments
Consider Your Credit
To accomplish your goals and make sure refinancing works to your advantage, you should consider your credit and credit score. While the Federal Reserve is in charge of lowering short-term interest rates, that doesn't guarantee that mortgage rates or approved interest rates will follow. Typically, the interest rate you will get is based primarily on:
- Credit history
- Credit score
- Home equity
Consider Interest Rates
If your credit is ideal or has improved enough to refinance your home at a better rate, make sure that the drop will benefit you financially. The general rule was not to refinance for many years unless the interest rate dropped by a percentage point or more. However, with economic instability and inflation, now we see that some people benefit from even a 0.5% drop, while others will only benefit from a more significant reduction.
When deciding whether or not the new interest rate will benefit you, run your new monthly payment against your old one and include the additional costs to see if and when you will reach the break-even point or save money.
- Complete refinancing costs
- Prepayment penalties or ballooning
- Whether you have at least 20% in home equity to eliminate mortgage insurance
- The new interest rate you qualify for
Consider Loan Terms
Saving money on a monthly payment isn’t always technically “saving money.” While you can refinance to make your monthly payment go down, remember that the lower your cost, the longer you pay interest, and the less you pay towards the principal of your home.
Eliminating Mortgage Insurance
If you need to refinance for financial hardship or make your monthly payment manageable, try to wait until you have 20% equity in your home. Without 20% equity, you will have to pay a built-in mortgage insurance payment, which can be costly. However, it can bring your refinanced payment back up to the original amount in some cases.
Consider Your Situation
Before gathering your paperwork and paying a few grand in closing costs, carefully evaluate your situation. Sometimes, a lower interest rate might seem like the time to jump on refinancing, but it’s best to consider your financial goals to ensure the refinance details match your needs.
Contact the expert mortgage advisors at Right Start Mortgage for more information on the refinancing process or request a free personalized rate quote.