When Is a Good Time for Refinancing a Home Mortgage?
Money & Co

When Is a Good Time for Refinancing a Home Mortgage?

Your home mortgage is quite likely one of your biggest expenses each month. After all, your home is your castle. Your shelter from the world outside. You take great pride in making your home feel comfortable and inviting for the people who live in it and your guests alike. But, there are times when refinancing mortgage loan terms might offer bigger benefits than keeping them as they are. These are several of the times in your life when you might consider refinancing your mortgage.

When Interest Rates Are Low

The interest rate you pay on your mortgage ultimately determines how much you will pay for your home. Reducing your interest rate by one percent over a 30-year term can adjust those number substantially. If you can reduce it even more by refinancing now, you will probably not find a better time in the near future to refinance your mortgage based on the interest rate equation alone.

While interest rates today aren’t at the all-time lows experienced a year or more ago, they are still lower than what many homeowners have on their existing mortgages. More importantly, they’re on the rise. They haven’t accelerated rapidly just yet, meaning there is still time to lock in lower interest rates for the remainder of your mortgage if you’re interested in reducing the total amount you will ultimately pay for your home.

When You’ve Improved Your Credit Score

Many people make concerted efforts to pay off debt and improve credit scores. When you’ve increased from a fair to a good or even excellent credit rating (760 or higher) it is the ideal time to explore home refinance programs and consider your choices to refinance home loan terms and interest rates.

Why?

Because the simple act of refinancing mortgage loan terms can help you cut your monthly payments and the total amount you’ll pay for the loan. For a $216,000 mortgage with a 30-year fixed-rate mortgage at a 5.23 percent interest rate (for a fair credit loan), monthly mortgage payments will be $1,190 month (not including insurance, PMI, etc.).

With excellent credit, you can reduce your interest rate to 3.64 percent (depending on the current interest rate standards) and your monthly payment to $987. It doesn't sound like all that much for the month-to-month difference, though it can aid the household budget greatly to increase spendable money by $203.

However, when you see the difference adjusted over 30 years, it tells a different story.

· 30 years at $987 per month equals $355,320.

· 30 years at $1,190 per month equals $428,400.

That means you’ll pay $73,080 more for the same $216,000 home. On the flip side, by refinancing your mortgage for a lower interest rate once you’ve improved your credit score, you may be able to save a sizable chunk of the difference.

When You Want to Improve Your Home

Financing home improvement projects can add up quickly if you aren’t careful. While you will still need to create a budget and carefully stick to that budget if you turn to home refinance programs for assistance, you may be able to enjoy a more enjoyable upgrade for your kitchen or bathroom by doing so.

Just pay attention to restrictions. Some programs have strict restrictions on how their money can be used, which is why you want to compare refinance home mortgage options and choose the one that meets your needs best.

When You Want to Cash Out Your Equity

People have different reasons for wanting to cash out the equity in their homes. Some of the most common reasons include one or more of the following:

● Pay off credit card debt.

● Pay for a child's college.

● Pay medical bills and expenses.

● Go on a dream vacation.

● Make a large purchase (like a swimming pool, home addition, or automobile) without paying higher interest rates.

● Pay for a child’s wedding.

It doesn’t matter why you want to cash out the equity in your home. There are programs available that can help you do just that.

When You Want to Reduce Monthly Expenses

Perhaps you’re preparing to go from two salaries to a single income household so one parent can be home with children. Maybe you’re approaching retirement and looking for ways to reduce monthly expenses as you make the transition. Maybe you’ve lost a job due to downsizing and now need to downsize your expenses.

Refinancing your mortgage can help you cut your total overhead for the month, freeing up a good portion of your money for other expenses – especially if you have improved your credit and developed equity in your home.

Then there are other reasons to consider refinancing a mortgage loan, such as switching from an adjustable rate mortgage (ARM) to a fixed rate mortgage or reducing the term of your mortgage (or extending it). Whatever the reason, explore your options, and choose wisely.