A survey of homeowners found that 17% of homeowners in the US with a mortgage on their residence, refinanced in 2020. Another 31% said that they were considering doing the same in the subsequent years.
Generally, many refinance when the mortgage rates fall. In most cases, it is a good decision. But how do you determine the best time to refinance?
Begin by determining the period of your stay, also consider your credit score and financial objectives. In addition, it is good to also consider the current refinancing interest rates.
The best time to refinance is when you are interested in turning a less desirable mortgage better. In addition, you can do it in the following cases;
When switching from an ARM to a fixed-rate mortgage
Adjustable Rate Mortgages (ARM) start as fixed rates in the first few years. Later, the rates adjust based on several factors such as the mortgage market and the rates in which banks lend each other money.
In essence, ARMs transfer the risks of rising interest rates to the homeowner. As you can see, an ARM can turn out to be costly. Thus, refinancing to a fixed-rate mortgage can be a smart decision in order to avoid the risk of rising payment rates.
When reducing a high-interest rate mortgage
Sometimes, the interest rates in the current market can be lower than your mortgage rate. In this case, refinancing can be a good decision to lower your interest rate or shorten your payment schedule.
A loan that offers a 1-2% drop in interest rate from your current mortgage rate is good enough. It also makes a huge difference in your ability to pay off the mortgage faster. However, it’s good to also consider how long you are planning to stay in your home. Refinance if you plan on staying for a long time.
When shortening a mortgage term
If your mortgage rate is long, for instance, 30-years or more, refinancing can be a smart move to shorten it. If this is the case, then you should consider aiming for a 15-year fixed mortgage rate with payments that do not exceed 25% of your income.
If your interest rate is low for a 30 year fixed rate mortgage such that it competes with the 15-year rates in the current market, then it is wise to get the short-term rate if it won’t cost you an arm and a leg. Consider paying extra every month to shorten the payment schedule and own your home sooner.
When consolidating a second mortgage that is more than half your income.
Homeowners with second mortgages can be quick to roll it into a refinance with their first mortgage. It is advisable to pay off the rest of your second mortgage debt if it is less than half your annual income. However, if the balance of your second mortgage is more than half your income annually, refinancing the second along with the initial mortgage is advisable.
While refinancing, you may be required to pay the refinance closing costs such as the refinance application fee, the home inspection fee, origination fee, lender’s attorney review fee, and points fee.
If you are plan on refinancing your mortgage, contact Belay Mortgage Group for expert advice on refinancing and any kind of financial advice.