When Is The Right Time To Refinance Your Home Mortgage?
For many people, 2020 was a financial challenge. Millions of Americans have lost their jobs or have faced serious questions about their finances. This is why many people turn to refinance their home loans to get some extra breathing room and take advantage of the historic lows in interest rates.
Like many others, we knew this was the year we needed to refinance our home to get a better rate and lower our monthly bills. But before you apply to refinance, here are a few things you should know.
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Should we wait to refinance?
2020 broke records for low-interest rates to home loans, making it the right time to look at how much interest you are paying on your existing home loan.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.90% from 2.92% — lowest in the MBA’s 30-year survey history – CNBC
To find out if this is the right time to refinance, we first looked at a Mortgage Calculator. We then looked at how much we still have to pay on our current balance and then compared that to new loan offers to our old terms to see how much we could save each month.
What is refinancing a loan?
If you are new to home loans, refinancing simply means that you replace your current home loan with a new loan with different terms. For us, this means we replaced our old mortgage that had a 4% interest rate with a new one that was a little less than 3%. This means we save money each month, not paying that 1% to the interest.
Some people also refinance to do home renovations. This was a big year for home renovations as more people were staying home instead of traveling. People can take cask out of your loan to pay for significant home renovations or pay off large debts.
Your new loan also factors in how much equity you have in the house, what improvements have been made, the new appraisal rate for your home, and your credit score.
Why should you refinance your mortgage?
This year made us all look at our personal finances a little closer. From buying your dream home to wondering how we were going to make our mortgages if we lost our jobs. Everyone has had the stress of uncertainty facing them.
One of the best practices you can do to save money is to keep an eye on home loans’ interest rates when you own a home. This can help you to save money each month.
You can also choose to pay your house off quickly, so you won’t be paying as much to interest at the end of your loan. That can save you a lot of money!!
Are you paying PMI? Private Mortgage Insurance is a fee that can cost a lot of money each month, but if you have enough equity in your house, you might be able to remove that extra insurance from your mortgage and drop that fee.
What you should know about refinancing:
Refinancing isn’t free. You will need to pay for the new loan fees just like you did when you bought your home. These fees will cost around $5,000 and include expenses like appraisal fees, credit reporting fees, and title services.
Some loans can roll in those fees into the loan, so you don’t have to pay at the new loan signing. You might also be required to pay points to get to a new lower rate. If you refinance with your existing lender, you might get a break on some of their fees.
We suggest using a Refinance Calculator to see how those fees and the new length of the loan amount compared to what you are paying now.
Make sure you shop around for the best rates and fees. We use a mortgage broker whose job is to seek out the best rates for us and gather all of the information for us.
Think you are ready to refinance? Ensure you understand the mortgage key terms before you begin, so you aren’t lost when it’s time to talk to the lenders.
Do I still have to pay the mortgage for the month that we refinance?
NO! We have actually refinanced a few times, and we learned the hard way to stop the reoccurring payment for our mortgage. Once, we accidentally forgot to stop that payment, and it wasn't easy getting that refunded back to us.
You get to skip the month’s payment when you refinance. You can use that money to pay an extra payment towards the principal or use it for paying down other bills.
You will also get the money held in the escrow account refunded back to you. This helps with some of those fees you will have to pay.
Take control of your personal finances, and feel empowered!
2020 was a challenging year for many. But through careful budgeting and keeping an eye on your outgoing money, you can take control of your money and feel like you have some power in this chaotic time.