What Are the Benefits of Refinancing Your Mortgage?

Is refinancing your home loan the right choice for you? Do one thing: If you are considering refinancing, research and get quotes from several lenders (at least three) to find the best rate before taking the plunge.

When should you refinance a home loan? The answer? It depends. A refi is when you pay off your current home loan with money from a new, cheaper one. There are several reasons you might want to refinance a mortgage, including:

• Lowering your interest rate and monthly payment.
• Reducing (or occasionally increasing) the length of a loan.
• Obtaining a fixed-rate mortgage to avoid paying more when an adjustable-rate loan increases.
• Cashing out equity to pay for home renovations, high-interest credit card debt, or some other purpose.

Do the mortgage math: Unfortunately, refinancing your current mortgage doesn’t come without costs. It typically can run between 2% and 5% of your loan. So, figure out what a refinance will cost you, then divide that number by the amount that you will save every month on the payments. The answer is the number of months you have to stay in the house to make the financial transaction worthwhile. 

Here’s an example: Let’s say you determine the cost of the refinance is $1,000, and that translates into a savings of $50 a month. You would need to stay in your home for at least 20 more months. This means that if you have no plans for moving in the next two years, a refinance could make sense. If you do plan to move and sell the home in less than two years, it’s likely not in your financial best interest to refinance.  

Does it pay to refi? Another way to determine if refinancing is worth the time, effort, and money is to look at how much you’re able to lower your interest rate. The rule of thumb used to be that it didn’t pay to refi unless you could lower your rate by at least two percentage points – say from 8% to 6%. That’s no longer true. Today, it can make sense if you can save as little as 1% or 1.5%. 

Pay attention to your credit score: You also need to make sure your credit score is at least as high as it was when you took out the loan. If it’s considerably lower, you may not qualify for a better rate. On the flip side, if your credit score has improved over time, you could qualify for an even better (lower) rate.

Use an online calculator: Fortunately, there are several online mortgage calculators, including one on bfcu.org, to help you determine how much you could potentially save by refinancing your home loan. And those who use the SavvyMoney tool in the BFCU app or online banking can also see what refinancing a home loan would look like using their online banking dashboard. 

Consider the alternatives: While there are benefits to refinancing, consider applying for a home equity line of credit or home equity loan as an alternative. Our award-winning mortgage loan officers can help you through your home journey. They’re just a text away! Text or call 318-549-8170 to get started.

Article courtesy of our partnership with SavvyMoney. Read full article here:
education.savvymoney.com/spending/what-are-the-benefits-of-refinancing-your-mortgage/