Its Better To Refinance Sooner Rather Than Later
Its never too early to think about refinancing your home loan.
There is no minimum time wait. A mortgage is a contract. As soon as you can get a better deal, you should terminate the contract and take that better deal, says Realtor and real estate attorney Bruce Ailion.
Closing attorney Chuck Biskobing says there are no major risks to refinancing within a year or so of purchasing.
Ive seen people refinance three times in a year to follow falling interest rates, says Biskobing.
Say you want to apply the money saved each month back to the loan in the form of accelerated payments toward the principal, he says. If so, you will almost certainly pay off the new loan faster than the old loan. And youre not adding enough time on the loan to really matter.
In other words, youre not resetting your loan term by much if youre just six or eight months into the mortgage.
But if youre much further into your loan say five to 10 years resetting to a new 30year mortgage may not pay off.
To find out if a refi is worth it based on your remaining term, try this refinance calculator.
A Mortgage Refinance Is One Way To Save Money On Your Mortgage But Is It Right For You
Refinancing while mortgage rates are at historic lows could help you secure a lower rate and reduce the amount of interest you pay over the life of your loan. Heres what to keep in mind as you consider refinancing.
When interest rates go down, deciding whether or not to refinance your mortgage is often an easy decision. But in a rising-rate environment, you might be asking yourself, “Should I refinance my mortgage now, or wait until rates go down again?”
The answer largely depends on your situation. Before you refinance your mortgage, you should consider a few factors.
When Is It A Good Idea To Refinance
When you do a mortgage refinance, you trade your current mortgage for a new one. That new loan may have a shorter or longer term , but also, your goal should generally be to lock in a lower interest rate.
Refinancing is generally a good idea when:
- Refinance rates drop across the board.
- Your credit score increases a lot so you’re eligible for a much lower interest rate.
- You want to change the length of your repayment period — for example, go from a 15-year loan to a 30-year loan.
- You plan to stay in your home long enough to recoup your closing costs on your refinance and come out ahead by reaping monthly savings.
- You have an adjustable-rate mortgage and you want to lock in a fixed-rate loan before your adjustable rate climbs.
- You want to take cash out of your home via a product known as a cash-out refinance .
Keep in mind that refinancing won’t always lower your interest rate. If you swap your 15-year mortgage for a 30-year mortgage, you could end up with a higher interest rate, but your monthly mortgage payment should also shrink because you’ll be paying off your mortgage loan in half the time.
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Do I Need Flexibility Or A Rigid Payment Schedule
A common use for refinancing is to shorten the length of a loan and pay it off earlier. If current mortgage interest rates are lower than your current interest rate, itâs common to have a similar monthly payment amount while shaving years off your mortgage.
For example, homeowners with a 30-year mortgage may refinance into a 15-year loan. This can be a great choice, but there are things to consider:
First, most banks and other lenders will allow you to pay off your mortgage early. So, if you want to pay off your 30-year loan in 15 years by making extra payments, you may be able to do so. This can help you build equity faster and save on interest payments. If circumstances change and times get tough, you have the freedom to revert to the original contractual 30-year payment.
On the other hand, a 15-year loan typically offers even greater interest savings, and can also help you build equity quicklyâso you can own your home free and clear sooner rather than later.
Getting A Lower Interest Rate
Refinancing to get a lower interest rate can save you a lot of money over time, depending on the prepayment penalty and the size of your outstanding mortgage. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest, and if you hold a fixed rate mortgage, then you will pay the greater of three months interest or interest rate differential penalty . Donât let penalties deter you understanding the numbers helps you calculate whether a refinance will save you money.
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When Can I Refinance My Home
Most banks and lenders will require borrowers to maintain their original mortgage for at least 12 months before they are able to refinance. Although, each lender and their terms are different. Therefore, it is in the best interest of the borrower to check with the specific lender for all restrictions and details.
In many cases, it makes the most sense to refinance with the original lender, but it is not required. Bear in mind though, It’s easier to keep a customer than to make a new one, so many lenders do not require a new title search, property appraisal, etc. Many will offer a better price to borrowers looking to refinance. So odds are, a better rate can be obtained by staying with the original lender.
Is It Worth Refinancing For Half A Percent
An often-quoted rule of thumb has said that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance. But that’s traditional thinking, like saying you need a 20% down payment to buy a house. Such broad generalizations often don’t work for big-money decisions. A half-point improvement in your rate might even make sense.
To determine if refinancing makes financial sense for you, it’s a good idea to run the real numbers with a mortgage refinance calculator.
To calculate your potential savings, youll need to add up the costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs. Also, check whether you face a penalty for paying off your current loan early. Then, when you find out what interest rate you could qualify for on a new loan, youll be able to calculate your new monthly payment and see how much, if anything, youll save each month.
Youll also want to consider whether you have at least 20% equity the difference between its market value and what you owe in your home. Check the property values in your neighborhood to determine how much your home might appraise for now or consult a local real estate agent.
Once you have a good idea of the costs of refinancing, you can compare your all-in monthly payment with what you currently pay.
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You Need Cash To Pay Off Debts
If youve made payments on your mortgage, you probably have equity in your home. Equity is the difference between your homes fair market value and the amount you still owe to your lender. There are two ways to gain equity: You pay off your loan principal, or your homes value rises. As a rule of thumb, if your loan is more than 5 years old, youve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.
Cash-Out Refinance For Debt
A cash-out refinance allows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have.
For example, lets say you have a $200,000 mortgage and $50,000 worth of equity – this means that you still owe $150,000 on the loan. You might accept a new loan for $170,000, and your lender would give you the $20,000 difference in cash a few days after closing.
You might seek a cash-out refinance because you need money to pay off other debt. If you have debts spread over multiple accounts, you can use a cash-out refinance to consolidate your debts to a lower interest rate, pay off each account and transition to one monthly payment. Consolidation can help you keep a better record of what you owe and reduce instances of missed payments, late fees and overdraft charges.
Consider The Cost To Refinance
Before you decide on refinancing your TD Mortgage or a TD Home Equity FlexLine, be sure to look at all potential costs. Prepayment charges may apply if the agreement is ended before the term is done. There may also be associated fees for mortgage registration and property valuation.
But if youre able to take advantage of lower interest rates, your overall savings may make it worthwhile.
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Should I Refinance My Mortgage And When
Your mortgage may be one of the biggest and most important investments you make in your entire life and it can also help you reach your future financial goals. A mortgage refinance can be a wonderful tool to help you reach those goals sooner.
But is it the right choice? Heres a reference guide to help you decide if a refinance of your current mortgage is right for you.
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Other Good Reasons To Refinance
Another reason to refinance is that you can lower your monthly payment.
In the previous example, that owner could save nearly $100 a month by refinancing. That kind of green adds up fast. And it can make a big difference as your financial situation changes.
Maybe a baby is on the way. Perhaps you want to buy a new car. Or youre seeking to put away more money toward a college fund. These are all important motives to reduce your mortgage payments with a lower interest rate.
Refinancing sooner versus later can also be a good strategy if you:
- Want to take extra cash out to pay for something big like home improvements
- Want to use equity for debt consolidation, paying off highinterest credit cards or personal loans
- Want to switch from an adjustablerate mortgage to a safer fixedrate mortgage
- Need to take a partner off your loan due to a recent separation
- Have an FHA loan, which requires mortgage insurance premiums, and you want to eliminate those extra payments. A conventional wont require private mortgage insurance if you have at least 20 percent equity in your home
- Have seen a boost in your credit score recently you may qualify for an even lower refinance rate with a higher credit score
Yes, you could save money by getting lower monthly payments. But a mortgage refinance loan can also help you with biggerpicture financial goals.
How Old Will You Be When The Mortgage Is Repaid In Full
One downside to refinancing is that if you sign up for a new 30-year mortgage, youre restarting the clock until youre mortgage free. If youre already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean youre carrying debt into your 60s when youre likely going to be thinking about retiring.
Its possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.
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You Could Save More Each Month
If you refinance to the same term as your original mortgage, youre further extending the time you have to pay off the loan, meaning your monthly payment will go down. And if you can refinance the loan with a lower interest rate, your monthly payment could go down even more.
Heres an example of how your payment would go down.
Well use the same numbers as the example above. Keep in mind that these monthly payments do not include escrow.
You get a 30-year mortgage for $200,000 with a 4% interest rate. Your monthly payment is $954.
You refinance your loan after 2 years to another 30-year mortgage and keep the same interest rate. Since youve been paying for 2 years, your loan balance is now $192,812. By having a longer term and extending it back to 30 years, your monthly payment is now $920.
Lets say rates were low when you refinanced, so you also lowered your interest rate. Your new 30-year mortgage is $192,812 with a 3.5% interest rate. Now your monthly payment is $865.00.
The Latest Rates On Adjustable
- The latest rate on a 5/1 ARM is 4.539%.
- The latest rate on a 7/1 ARM is 4.857%.
- The latest rate on a 10/1 ARM is 5.002%.
An alternative to a fixed-rate loan is an adjustable-rate mortgage. The interest rate on an ARM will be fixed at first, then eventually become variable and adjust regularly. For example, the rate on a 5/1 ARM will be fixed for five years, then adjust annually. The initial fixed rate on a 5/1 ARM is typically among the lowest on the market, which can be an advantage. However, the rate could see a big increase once it becomes variable.
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Conventional Loan Refinance Rules
If you have a conventional mortgage one backed by Fannie Mae or Freddie Mac you might be able to refinance immediately after closing your home purchase or a previous refi.
Keep in mind many lenders have a sixmonth seasoning period before a current borrower can refinance with the same company. So youll likely have to wait if you want to refinance with the lender youre already using.
You can get around that sixmonth rule by simply shopping around and refinancing with a different lender.
But you can get around that sixmonth rule by simply shopping around and refinancing with a different lender.
While its rare, some lenders charge a prepayment penalty fee that could derail your refinance plans. Check to see if your current loan has a prepayment penalty clause before moving forward.
Its recommended that you shop around before refinancing, in any case, to make sure youre getting the lowest rate possible.
Wrapping Up: Why Refinance Your Home
Refinancing your mortgage can benefit you greatly and potentially save you tens of thousands of dollars in interest over the life of your loan. Keep in mind that youll likely need a history of mortgage payments for at least six months, your name on the title, and closing costs. Youll also need to meet all of your lenders other requirements, like low DTI and a suitable credit score.
If your credit score has increased significantly, you have built equity in your home, or average interest rates have dropped, refinancing might be in your best interest.
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What’s Changed From Your Last Loan Closing
Has your credit score and payment history improved since you got your mortgage? If so, you might qualify for a better interest rate on a refinance, which will help you save more per month and break even sooner.
On the other hand, hitting a rough financial patch can do a number on your credit, and that affects your ability to qualify for a refinance loan and get a good rate. If youve been late on a credit card payment, bought a new car or taken on student loans, your credit score might be lower than it was when you took out your original mortgage. Before refinancing, you might want to do some credit repair.
Mortgage Rates Have Gone Down
Mortgage rates for homeowners can fluctuate since theyre affected by a variety of factors, including U.S. Federal Reserve monetary policy, market movements, inflation, the economy and global factors.
If mortgage rates fall, you may be able to save by securing a lower interest rate than you have on your existing loan.
So how much should mortgage rates fall before you consider whether refinancing is worth it? The traditional rule of thumb says to refinance if your rate is 1% to 2% below your current rate.
Make sure to factor in your current loan term when considering refinance though. For instance, if youre four years into a 30-year mortgage and refinance to a new 30-year term, it will have taken you 34 years total to pay off your home in the end. Plus, youll likely pay more interest over the extended term than if you had chosen a shorter term.
No matter what rates are doing, youll want to check that the math works out in your favor. Make sure to calculate your break-even point and how the overall costs including total interest of your current mortgage and your new mortgage would compare, says Andy Taylor, general manager for Home/Mortgage at Credit Karma.
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