Should You Refinance Your Home?
A home is the biggest purchase most people will ever make. When buying a home, we are all impacted enormously by a factor largely outside of our control: interest rates. It is easy to underestimate the impact of rate differences since they often seem small; half a percent or one percent, in some cases.
Refinancing your mortgage means you take out a new loan, your new lender pays off your old loan, and you now owe the new lender instead. This may be the right move for you, especially given how low mortgage interest rates are now. However, there are many factors to consider before deciding.
Securing a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 4.5% reduces your payment to $506.69.
Your home has increased in value.
If the value of your home has gone up, you might also get some benefit from refinancing, especially if you have other high-interest debt to pay off.
When you get a cash-out refi, you take out a new mortgage that is larger than what you previously owed, and you receive the difference in cash. A cash-out refinance an alternative to a home equity loan.
For instance, say you took out a $160,000 mortgage five years ago for a $200,000 house (you already made a $40,000 down payment). After making regular mortgage payments, you now only owe $100,000 on the mortgage.
Due to the property market going up, the value of your house has increased; it is now worth $250,000. Now that the house is more valuable, you may be able to refinance for more than the balance of your mortgage, which is $100,000.
If you end up refinancing, say, for $120,000, you can now take the $20,000 difference in cash and use it to pay down high-interest debt or for major purchases, home improvements, and so on.
Your credit has improved.
Your credit score is a significant factor in determining your mortgage rate. Generally speaking, the higher your credit score is, the lower the interest rate you will receive.
Let’s look at a simple illustration. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO credit score is within the 660-679 range, the myFICO Loan Savings Calculator estimates you could pay 4.522 percent APR (based on interest rates as of February 2, 2017).
With this interest rate, your monthly payment would be $762, and your total interest paid across the 30 years would amount to $124,316.
In comparison, if your credit score were in the 700 to 759 range, the calculator estimates your monthly payment would drop to $727. Over the life of the loan, you could save $12,417 in interest.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in the house? How much money will I save by refinancing?
For the latest home decor furniture and design, visit Haynes Brothers and shop our catalog.
Leave a Reply
