If you didn’t take advantage of the previously low interest rates, there is a good chance you can still do it. There are millions of people that could save a substantial amount of money each month by refinancing.
But, before you take the step, here are some things you need to know.
It’s Going to Cost You
Most people only think of saving money when they think of refinancing, however, when you refinance you are essentially getting a new loan. That means you are going to have to pay closing costs. This can run anywhere from 2% to 5% of your loan total.
There are some options where the lender covers the closing costs on refinances. This can be a helpful option, but you are going to pay a higher interest rate.
Before refinancing calculate your two options to see which one will be smarter in the long run. At what point will the higher interest rate cost you more even though you didn’t pay closing costs?
Will Refinancing Benefit You Quickly?
The standard rule is that if your current rate is 100 basis points above where current rates are it is a good time for you to refinance. To determine this you first need to determine what your closing costs are, and then how long it will take you to recoup this.
At what point will the savings on your mortgage interest be more than the amount you paid to refinance the loan in the first place? The benefit will be different for each person. Some homeowners are just looking to lower their monthly payment more than save a total amount over the long-term.
You Could Eliminate PMI
If you have been paying for private mortgage insurance a refinance could help you eliminate that. If you currently owe less than 80% of the home’s appraised value you can stop paying for PMI. This alone can lower you monthly payment, while saving you thousands of dollars.
Look at the Big Pictures
If you have had your current mortgage for years your current payment is going to have a higher percentage of the monthly payment gong towards the principal on your loan. However, when you refinance you are basically starting your loan again, which means more of your payment is going to go back to interest.
This means you are paying less each month, but you are also paying less on your actual loan balance each month, too. Ask your lender for a true comparison of your current mortgage with what the new one would look like.
You Could Use the Equity
If you have been paying on your mortgage for years you have built up equity in your house. When you refinance you have two options. You could take the new mortgage for only the amount that you owe on the current one, or you could take out the equity you have as well.
This puts cash in your pocket. If you have been thinking about doing a remodel or addition on your house, this could be a good source of a loan to complete that work.
There are many benefits to refinancing your house. You could take advantage of a lower interest rate, thus leading to a lower monthly payment. Or, you could take advantage of the equity in your home and complete some projects you have wanted to do.
Whatever your motivation is, make sure you understand how your new rate and new mortgage will impact you for the long term.