Mortgage rates are falling again. The conforming 30-year fixed rate mortgage rate is down to 2.8%, according to Mortgage News Daily. As a rule of thumb, if your mortgage rate is 3.3% or higher it is probably a good time for you to refinance. Below, we review general guidelines of when it makes sense to refinance.
At some point during your mortgage term, you may consider refinancing your current loan. Whether your goal is to consolidate debt, take advantage of some better interest rates or take some money out against the equity of your home, there are many reasons why a homeowner may be interested in a refinanced loan. Here are four scenarios in which you may find it beneficial to refinance your mortgage.
Reason #1: To Obtain a Lower Interest Rate
One of the most popular reasons for refinancing a current mortgage is to take advantage of interest rates that are lower than when you took out your original loan. This decrease in rates can come from an overall drop in the average interest rate or an increase in the borrower's credit. When considering refinancing at a lower interest rate, take into account the closing costs and fees that will be associated with a refinance to make sure it is worth the switch. Prepare to pay between two percent and five percent of your loan's principal amount in closings costs when refinancing your mortgage.
Reason #2: To Consolidate Debt
Unfortunately, debt such as credit cards and high-interest loans can result in a significant amount of interest paid during the repayment period. Some homeowners may be able to use their home to help pay off this debt and repay the money at the lower mortgage interest rate. When considering this option, be sure to calculate the amount of interest you will pay throughout the life of your mortgage, and see if this repayment method will be the most cost-effective for your finances.
Reason #3: To Eliminate Private Mortgage Insurance
If the home was originally purchased when you had a poorer credit score or a lower amount for a down payment (typically less than 20 percent), you were likely placed with a loan that required private mortgage insurance (PMI). PMI results in a higher monthly payment for insurance to protect the bank in the event of a foreclosure, since either there was less equity put in the home or it was considered a higher-risk loan. Once you have established equity in your home, you may be able to refinance to remove the PMI and obtain a lower monthly payment.
Reason #4: To Change the Mortgage Term
When you first buy your home, you will often determine the term of your loan based on what you are approved for and how much you can afford for a monthly payment. As with anything in life, your situation can, and often does, change. You may find yourself wanting to refinance your mortgage to be able to shorten the term of your loan to pay less interest over time and get your house paid down earlier. If you are having a harder time affording your current payment, you may consider refinancing to extend out the term of your mortgage and reduce your payment to make it a better fit with your current budget. Common term lengths are 30, 20 and 15 years.
Depending on your needs, refinancing your mortgage could be a beneficial option for you. It is important to research and consider all the factors before making your final decision. As you determine your needs, work with your financial advisor. They can help you understand any potential costs, drawbacks or benefits from refinancing that are unique to your financial situation.
This content is developed from sources believed to be providing accurate information, and provided by MKAM and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.