A home mortgage is two things. One, it’s a big financial responsibility and two, it’s a big financial investment. Most homeowners will come to the point where they want to reduce that financial burden or take advantage of the investment. The only way to do this is to refinance the loan and secure better loan terms. But there are times when it’s wise to refinance and times when you probably shouldn’t. Below are 5 ways that will help you know when to refinance.
When to Refinance so Your Bottom Line Decreases
When the bottom line is mentioned, it is in reference to the total amount you will pay over the life of the loan. Every mortgage has an amortization schedule. This schedule shows how much you’ll be paying every month to principle and interest. At the beginning of the loan you will pay higher amounts in interest, but as you decrease the loan time you increase the amount going to principle. Knowing the schedule and the estimated amount to be paid is important before you refinance because then you can compare the old schedule with the new amortization schedule, which will help you determine if you are going to save money. Oftentimes homeowners lock themselves into another thirty year loan, which is just another way of extending the life of the original loan. The interest rate may be lower, but that added time means you will be paying longer. Sometimes this makes it so you pay more in interest than you would have. So if you compare both schedules and find that you will save money in the long run, you’ll know it’s a good time to consider a refinance.
It’s important to refinance when the interest rates are low. Knowing when to refinance helps if you track the interest rates and secure the financing while they are trending down or have hit a low point, rather than trending up. By reducing your interest rate you may be able to save thousands over the life of the loan. This is especially so if you’ve only had the loan for a few years. Again, make sure you compare your overall bottom line, but pay attention to falling interest rates because that is most commonly the best time to refinance.
Refinance to Adjust the Home Mortgage Terms
People choose to refinance so they can adjust the terms of the mortgage. As mentioned above, the interest rate is the first thing that should be looked at. If it can be reduced, it’s a good time to consider revamping the loan. But there are other items that can be adjusted on the loan as well that can help the homeowner save money.
The first item is the type of loan. There are two common mortgage types. These are the fixed mortgage and the adjustable rate mortgage, also known as ARM. The fixed mortgage is a mortgage where the interest rate has been set and locked in at a specific rate. It will not change over the life of the loan, regardless of how high or how low the market rates go. The ARM is the opposite. With this mortgage type the interest rate is fixed for a short period of time, but then it becomes adjustable and rises and falls with the trends in the real estate market. Switching your loan type can be advantageous depending on how long you intend to stay in the home. If you have an ARM loan but you want to live in the home for thirty years, you may want to switch to a fixed loan because then you’ll be able to count on the interest rate remaining low. On the other side, if you’re in a fixed mortgage and you intend to live in the home for five years or less, the ARM may be your best option. Many times it’s possible to secure a lower initial interest rate with an adjustable mortgage so you’ll be paying a lower rate during your time in the home. This can save you thousands over a five year period.
The second item that can be adjusted with a refinance is the loan term. Most homeowners get locked in on a thirty-year term, but sometimes you can save thousands by switching to a 15-year-mortgage. Switching to a shorter term loan is a smart move after you’ve gone over your finances enough to know that you can handle the increased demands of the mortgage because you will be paying more monthly to pay down the loan faster. You never want to do something that will keep you financially strapped, so this option should be discussed in detail with a professional financial planner.
Knowing when to refinance is as important as the refinance itself. As with any major financial decision, it is recommended that you discuss with a financial planner whether or not this is the right step for you.