By committing to a mortgage with lower interest rates, you can also lower your monthly payments. Over time, even saving $50 a month can add up to thousands over the life of the loan.
Still, there are pros and cons to refinancing, and you should be familiar with the costs and benefits before making adjustments to your existing mortgage. Below is a guide to help you decide whether refinancing your home is the right choice for you and your household.
There are a number of reasons why homebuyers choose to refinance their homes. They include:
Mortgage rates are not stagnant. They fluctuate over time, sometimes sharply. If you purchased a home during a time when mortgage rates were higher than they are currently, you can lower that interest through a successful refinancing.
Mortgage rates were on the rise throughout 2018 and have been predicted to remain the same or move higher in 2019. With market uncertainties ahead as rates possibly hit a high of 5.8% this year, youâ€™ll need to look closely at refinancing your mortgage.
If you entered a mortgage agreement with a lower interest rate than those in the current market, refinancing may not be right for you unless youâ€™re opting to change the length of the mortgage term. On the other hand, if you currently have an ARM and are worried interest rates will continue to rise, you may consider refinancing in 2019.
Unfortunately, refinancing isnâ€™t free. You may find yourself already familiar with some of the costs associated with refinancing, as they are similar to the ones you encountered when first taking out a mortgage. You may have to pay loan-origination fees, points on the principal, closing fees, appraisal and inspection fees, attorney fees and others.
Be prepared to pay between 3% to 6% of the remaining principal during the course of refinancing a home to pay for the above expenses, as well as any prepayment penalties you may incur from your lender.
These fees may cancel out the savings you would incur by refinancing your home.
Doing the math to see whether fees and other associated costs add up to more than the savings will help you see if you could benefit from when you refinance a home. You may find that itâ€™s better to pay off your mortgage quicker by increasing your monthly payments rather than entering a refinancing agreement.
If your main goal with a refinancing is to shorten the term of your loan, you may be able to do so by paying more toward your principal each month. Even increasing monthly payments by $50 each month can add up to thousands saved in interest costs and reduce the life of your loan by a few years.
When deciding whether to carry out a home refinancing, tally up the costs, any penalties and other fees to calculate the break-even point for your new loan. Before entering a new loan agreement, you can estimate how long it will take you to break even between refinancing costs and your new, lower mortgage rate.
There are a few different ways to refinance your home. Namely, there are the options for a cash-out refinance or a traditional refinancing.
Shop around for lenders to get the best rates when refinancing a home. Keep your eyes on the market to see how mortgage interest rates are trending in order to land the best rate. Also, shop around for a lender that offers lock-in rates, which is a lenderâ€™s commitment to maintain the terms of a specific interest rate while your refinancing application is being processed. Lenders may charge you a flat lock-in fee.
You can also increase your chances of refinancing with a new, improved mortgage interest rate by focusing on the state of your other personal finances, particularly your credit score. You may be eligible for better interest rates or lower monthly payments if youâ€™ve improved your credit score since you entered your initial mortgage agreement.
Itâ€™s also possible to negotiate closing costs, including the cost of a title search and title insurance. If you have insured your homeâ€™s title within the last 10 years, you may be eligible for a discount. Ask the lender holding your title insurance policy if it can reissue your policy, rather than conducting a brand-new title search again, and you may be able to save on these costs.
Thereâ€™s no foolproof way to predict the state of the housing market; as such, you can expect mortgage interest-rate fluctuations every year.
The same is true for 2019, which is why youâ€™ll need to consider refinancing with care. Evaluate why you want to refinance, whether itâ€™s to shorten the life of the loan, decrease monthly payments or to move from an ARM to a fixed-rate mortgage.
Be sure to calculate the costs saved versus expenses that arise during the loan process, keep your eye on the loan markets and make sure to find the best possible rate for yourself when exploring refinancing your home.