When to refinance a mortgage
You’ve probably heard that interest rates are at historically low levels right now. So if you were to buy a house in the very near future and were lucky enough to get locked into one of these historically low interest rates, hooray! There is a chance that you have the absolute best rate deal that you will ever get.
But let’s say interest rates fall even more in the future. Or, your credit score climbs to the next level and you may qualify for a better interest rate on your mortgage. No need to experience FOMO; in these scenarios, you might consider refinancing to take advantage of these better rates.
Simply put, when you refinance, you get a new mortgage that pays off your existing mortgage, says Holden Lewis, a real estate and mortgage expert with Nerdwallet. People refinance for a variety of reasons, but a common scenario is to lower their interest rates and therefore lower their monthly mortgage payments.
But refinancing is not free. You still need to take out the loan, and closing costs typically range between 2% and 5% of the amount you are refinancing. For example, if you refinance a loan of $ 200,000, you would expect your closing costs to be between $ 4,000 and $ 10,000.
“When refinancing, it is important to determine when in the future you will break even with your cost of refinancing,” said Steve sexton, financial consultant and CEO of Sexton Advisory Group. It may not be a good idea to refinance if you have a long period of payback, especially if you plan to sell your home before you achieve it.
Several online refinancing calculators (here is one of Nerdwallet) can help you determine how much you would save by refinancing. You plug in numbers like your loan balance, original consolidation loans terms and interest rate, then refinance terms and rate, and the calculator will give you an idea of what you could save. Once you’re serious about refinancing, a financial advisor can help you determine if it’s the right decision.
Another common reason for refinancing is to get rid of the mortgage insurance that you pay if you took out an FHA loan and put less than 10%. Lewis explains. FHA loans are popular with first-time buyers due to the low down payment requirements. In 2019, first-time buyers formed 83 percent of FHA home loan borrowers, according to the Federal Housing Office.
With conventional mortgages, your private mortgage insurance – the monthly payment you make to protect your lender in the event of your mortgage default – goes down once you’ve built enough equity in your home. However, to get rid of mortgage insurance on most FHA loans, you actually need to refinance a conventional loan.
Take-out here? Even after taking out a mortgage, it’s a good idea to keep an eye on interest rates so you can decide if refinancing is right for you.
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