Refinancing your home loan is a simple process but a big decision.
Refinancing simply means that you get a new mortgage to pay off your existing mortgage. So your current mortgage is replaced by a new mortgage with new terms.
But how do you know when it’s time to refinance your home loan?
Here are four signs it’s time to refinance.
1. You Can Get a Better Interest Rate
If you can get a lower interest rate than you have on your current mortgage, you benefit from lower monthly payments and a lower interest expense over the term of your loan. There are fees for refinancing, but if you can lower your interest rate by just a single percentage point, it’s usually well worth it.
There are a few times you might be able to get a lower interest rate through refinancing:
When interest rates are down. Mortgage interest rates change over time based on the Federal Reserve raising and lowering general interest rates. If rates are lower today than when you got your current mortgage, you can most likely refinance under today’s lower rates.
When you have substantially improved your credit score. Having a higher credit score qualifies you for a lower interest rate on your home loan. So if your credit score is much higher today than when you got your current mortgage, you could potentially get a lower interest rate with a refinance. Just remember that this will be limited by today’s going interest rates. So if interest rates are up, it’s possible that you won’t be able to get a better rate, even if you have a higher credit score.
When you have a new domestic partner with a higher credit score than yours. If you and your new partner are comfortable being co-borrowers, you can leverage your partner’s great credit to potentially get a lower interest rate. Again, this will depend on today’s going rates.
2. You Have Enough Equity in the Property to Remove Your Private Mortgage Insurance (PMI).
If your original down payment was less than 20% of the purchase price, and you don’t have a VA loan, you are probably paying private mortgage insurance (PMI) or mortgage insurance premiums (MIP). Once you have enough home equity (through paying down your debt, increases in property values, or both), you can probably refinance to remove the mortgage insurance.
3. You Need to Tap into Your Home Equity for Cash
Did you know you can pull cash out of your home when you have enough home equity? Whether you need money to pay off high-interest debt, start your own business, or fund a new investment, cash-out refinances allow you to get a new mortgage that pays off your original loan and puts cash in your pocket!
Just understand that cash-out refinances increase your loan balance, so you’ll likely end up paying more in total interest expenses over the term of the loan.
4. You Need a Lower Monthly Payment
If you’re struggling to make your mortgage payments, you can probably refinance to spread your current balance over a new 15 or 30-year term. This could mean substantially lower monthly payments. Of course, extending your loan term will likely result in a greater interest expense over the term of the loan. But if it will make your monthly payments manageable, it could be well worth this trade-off.
We’re Here to Help!
At Sequoia Real Estate, we help Bay Area locals buy and sell homes. But our service doesn’t end on closing day! We want to continue providing useful information to area homeowners to make their homeownership experience as enjoyable and profitable as possible.
If you have questions about refinancing, we’re happy to connect you to a reputable lender who can explain your options and help you get the best terms possible on your new mortgage. Whether you’re buying, selling, or refinancing, Sequoia is here to help with all your real estate needs. Contact us today with your real estate questions!