It is estimated that, on average, Americans refinance their mortgages every four years. The decision for refinancing isn’t always easy and requires a thorough consideration of several factors that can make or break your strategy. In fact, refinancing your mortgage at the wrong time may have a major impact on your finances for the years to come.
The following are factors you should consider towards the decision to refinance your mortgage.
1. Switching to a fixed-rate mortgage
Often, mortgages are on an adjustable rate, known as ARM. Typically, an adjustable-rate mortgage fluctuates in response to the changes in the T-Bill rates in order to be in line with market rates and therefore it offers higher rates than fixed rates mortgages to compensate you for the extra risk you undertake as a result of the fluctuations. This means that the ARM on your mortgage may also increase. If you expect rising interest rates, you may switch your mortgage to a fixed-rate loan in order to lock the interest rate and avoid fluctuations on your interest payments.
2. Lower interest rates
Typically, refinancing makes sense if you can get lower interest rates in order to lower your mortgage payments. If you decide to refinance your mortgage, make sure to achieve new rates that are at least 2 percentage points lower than the ones you originally had. For instance, if the original interest on your mortgage is 9 percent, make sure to get at least 7 percent for refinancing.
For example, assuming you have a $220,000 mortgage for 25 years with 9 percent interest, you mortgage payment would be $1,864.23. By refinancing at 7 percent, your mortgage payment will be $1,554.91, thus saving $309.32 every month on your mortgage.
3. Mortgage terms
Changing the mortgage terms can also lower your mortgage payments. A shorter mortgage term will allow you to build equity quicker and save money over your mortgage life.
For instance, assuming you have a $220,000 mortgage for 25 years with 9 percent interest, you mortgage payment would be $1,864.23. If you change your mortgage terms from 25 to 15 years, your payment will be $2,231.39, thus paying more $385.16. Yet, you will save money on the interest rate because in 25-years term the total interest would be $333,869.60 while in 15-years term, the total interest would be $181,649.57, so you save 152,220.03 over the life of the mortgage.
4. Home equity
Most homeowners acquire their mortgage with a down payment of less than 20 percent. However, as the value of your property may have increased over the years, your home equity may now be more than 20 percent of your property’s value. In this case, you can achieve refinancing for at least 80 percent of your home’s total property value.
5. Improved credit rating
If over the life of your mortgage your credit score has improved, you may be eligible for a better interest rate for refinancing. Your credit score is very important to convince your lender that you are eligible for low interest rates on your mortgage.
Conclusively, when considering refinancing make sure to consider all above factors to make a firm decision and avoid losing money over the life of your mortgage. In addition, you should take into account bank fees, lawyer fees, appraisal and inspection fees and/or other fees that may emerge. Refinancing your mortgage at the right time can save you a lot of money, but refinancing at the wrong time may even lead you to bankruptcy.