When you decide to refinance your mortgage you are paying off your current loan and replacing it with a new one that suits you better. Whether you are making your change for a lower interest rate or to change the term of your loan, refinancing your mortgage can be a great way to save money or compensate for big financial changes in your life good or bad. But how do you know when refinancing your mortgage is the right move to make for you? We will discuss some of the most important factors that influence whether or not you should refinance your current mortgage loan.
One of the best an most common reasons to refinance your mortgage is to acquire a lower interest rate. A lower interest rate will mean smaller payments over a potentially shorter period of time, making the benefits of switching clear. Refinancing for a lower interest rate will also help you build equity in your home faster, which accelerates the rate at which the home truly becomes your property that you own yourself.
You should be slightly careful when deciding when to switch your interest right. Usually lenders say it is not worth changing your loan for a better interest rate unless the new rate is more than 1% lower than your current rate. Some will even say you should not switch unless the difference is greater than 2%. If you can find another mortgage with a rate that meets these recommendations, it might be a good time to refinance.
The Loan’s Term
When refinancing with a lower interest rate, you do not necessarily have to keep your period of the mortgage loan the same. This is only the case for homeowners looking to decrease their regular monthly payments, but keep the same term for the loan.
Some homebuyers might decide that they can still afford the regular monthly outgoing payments they are currently making, and rather choose to shorten the term of their mortgage loan so that they might pay it off completely and become debt free in a shorter period of time than they will with their current mortgage. If you can find a new mortgage plan that shortens your loan period while keeping your monthly payments relatively the same, it may be the right time for you to refinance.
The Type of Rate
Another reason to refinance your mortgage is switching the type of rate you have from a fixed-rate mortgage to a variable-rate mortgage and the other way around. Making the switch from one to the other depending on the behavior of the mortgage loan market. If you are currently on a variable rate plan and you find that periodic adjustments are resulting in a significant increase to your interest payments, you may want to switch to a fixed-rate for lower interest. If you have a fixed-rate mortgage and you see that interest rates in the industry are falling, it might be a good idea to make the change to variable to take advantage of the market’s low rates.