With interest rates being at an all-time low the possibility of refinancing your home loan to get a better rate is like dangling a piece of candy in front of a child. You want to jump at the chance to lower your payments, or to decrease the number of payments that you have. It is definitely something that you need to look in to and consider, but make sure that it is the best move for you.
What is meant by that is your specific situation is unique, and even though you may get lower rates, there are circumstances in which it may end up costing you more to refinance than it would have been if you had stayed with the original loan. Let’s look at this a little deeper before we move on.
- If you do not have enough equity in your home, it would not be a good move to refinance. If you are not sure what the equity of your home is, you can find out by doing a simple mathematical equation. You will want to take the current value of the home and subtract the amount that you have left on the loan. Whatever you come up with is how much equity you have gained on your house. If you are in the negative, you will need to stick with the loan you have. Many companies will not even give you a loan unless you have around 20% of equity built up.
- If your credit has changed for the worse, you will want to crunch some numbers before you refinance. As you remember when you first applied for the loan the bank will run your credit score, check your income, check your debts, verify your job, and so on and so forth. A drop in income, or an increase in your debt-to-income ratios, will mean a higher rate so you will not be able to take advantage of better loan terms.
- If the break-even point is too long, you will also want to pass on the new loan because you will not be able to take full advantage of the savings. In case you need a refresher, you can figure out your breakeven point with some more simple math. You will need to take the closing costs and divide it by the monthly savings. The number that you will come up with is how long it will take to see any savings. This is your break-even point.
Now that we have gone over some of the main reasons why you would not want to apply for a refinance loan, we need to discuss some of the reasons why you would want to take advantage of the current low rates. Before we get into that, though, you need to know a couple of things.
First of all, you should talk to your current lender and see if they can give you a refinance loan that would be beneficial to you. If not, use an online comparison site and see what your best options are (see more information here.) Remember to analyze every aspect of the contracts being offered before you sign on the dotted line.
With that being said we need to look into the reasons why you want to go forward with a home refinance loan.
- The first, and the most obvious, reason to apply for a refinance loan on your home is to save some time, and money. Getting better terms and lower rates on a loan can help add more money into your pockets, and less going out in payments. That is, of course, unless you want higher payments and less time on the back end of the loan.
- If you have over 20% equity built up on your house, it is a perfect time to do a cash out refinance loan. This means that you get a new loan that is for the amount of your house’s current market value. You can use the extra money to pay off debts, remodel your house, or invest in a second house to use as a vacation spot. The choice is yours because the money is yours.
- If your current loan is a variable rate loan it would be a great time to refinance so you can switch it over to a fixed mortgage. To explain, a variable rate mortgage is one that will charge you interest based on the current market rates. A fixed loan will charge you a set amount for the length of the loan. You should be able to see how this can be an advantage, but if not, just realize that in the end when the market rates go up you will still only be paying the smaller amounts that you have set.
- If at any time during the first loan you had to take out a second, or third, mortgage now would be the time to get a low interest refinance loan that combines them all into one. Just so we are clear it is not ever in your best interest to take out more than one loan on a house. It is understood that sometimes it is the only way out of a situation, but most times it will put you farther behind than what you were in the first place.
- If your original loan required you to carry expensive mortgage insurance, getting a low interest refinance loan can help you. It will allow you to get a basic loan without the extra cost of insurance unless you have gone backwards with your finances and credit. As mentioned earlier, if you are in a worse place then you where it may not benefit you to refinance.
That is about all that there is to. This ultimate guide to home loan refinancing gives you reasons why you should refinance, and when you should not take the leap. If you fall under the section where it will benefit you make sure to use an online comparison site and look for the best deal at the best rates. It is that easy.
