To know if it’s the right time to refinance, first determine how long you plan to stay in your home, consider your financial goals and know your credit score. All of these things, along with current refinance interest rates, should play a role in your decision about whether, and when, to refinance.
The reason people start thinking about a refinance is when they notice mortgage rates falling below their current loan rate. If you’re looking to pay off the loan quicker with a shorter term, you may want to refinance.
If you’ve gained enough equity in your home to refinance into a loan without mortgage insurance, it may benefit you.
When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow. Mortgage rates don’t always move in lockstep with short-term rates. Mortgage refinance rates change throughout the day, every day. The rate you’re quoted may be higher or lower than a rate published at any given time. Your mortgage refinance rate is primarily based on your credit score and the equity you have in your home. You’re more likely to get a competitive rate as long as your credit score is good and you have proof of steady income.
“An often-quoted rule of thumb has said that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance. But that’s traditional thinking, like saying you need a 20% down payment to buy a house. Such broad generalizations often don’t work for big-money decisions. A half-point improvement in your rate might even make sense.” – Information by Homes in Calgary – Greg Kennedy
To determine if refinancing makes financial sense for you, it’s a good idea to run the real numbers with a mortgage refinance calculator. When you find out what interest rate you could qualify for on a new loan, you’ll be able to calculate your new monthly payment and see how much, if anything, you’ll save each month.
You’ll also want to consider whether you have at least 20% equity, the difference between its market value and what you owe in your home. Home equity matters because lenders usually require mortgage insurance if you have less than 20% equity. It protects their financial interests in the event you default. Mortgage insurance isn’t cheap and it’s built into your monthly payment, so be sure you wrap it into calculations of potential refinance savings.
If you’re already 10 or more years into your loan, refinancing to a new loan tack on interest costs. That’s because interest payments are front-loaded; the longer you’ve been paying your mortgage, the more of each payment goes toward the principal instead of interest.
Ask your lender to run the numbers on a loan term equal to the number of years you have remaining on your current mortgage. You might reduce your mortgage rate, lower your payment and save a great deal of interest by not extending your loan term.