Should you refinance again? Homeowners under a mortgage loan will probably ask this question a few times throughout their contracts. This is a common question from borrowers and comes with a few considerations.
In 2020, the rates plunged to an all-time low record. The situation prompted people to refinance their mortgages to reposition their rates at a much lower value. In return, they have experienced lower monthly costs than what they paid before. But when is the best time to refinance?
1. At a Great Break-even Point
Refinancing can add up to two to four percent of the loan amount. However, it also lessens your monthly amortization for the duration of the loan.
Itâ€™s essential to calculate your break-even point, which is when the lower payments will equal the closing costs from the new loan. Finance experts say that financing is a Math game of how much can be saved and how long it takes to break even. Note that refinancing also includes risks that may be unpredictable.
2. During an Increase in Home Value
A falling rate is only one variable that initiates a refinancing move. Another factor can be your homeâ€™s value. Property prices are continuously rising in the market. A property bought last year with a low down payment may be worth more only a year after.
Try to take note of your propertyâ€™s loan-to-ratio value. If itâ€™s too close to the 80 percent threshold, you might be freed from private mortgage insurance. Meanwhile, a lower loan-to-value ratio can qualify for a better mortgage rate.
3. Before Tapping into a Bit of Home Equity
Both refinancing and home equity carry risks for homeowners. But sometimes, people prefer to refinance instead of acquiring a second home loan. Home equity loans are considered unsecured loans because your property collateralizes them. Although it sets a lower interest rate, it allows the lender to come after your house if you default on it.
4. To Shorten the Loanâ€™s Term
When interest rates plunge, it instantly signals homeowners that they have the chance to refinance an existing loan for another loan that wouldnâ€™t change the amount they pay every month for a shorter term.
For example, a 30-year fixed-rate mortgage on a $100,000 home can reduce the 9 percent interest rate to 5.5 percent and cut the duration in half. The move will increase your monthly payment from $805 to $817 but with a shorter amortization period.
Why Do People Refinance Their Mortgages?
While itâ€™s generally a risk to refinance your loan, itâ€™s also a great way to earn more from what you pay for. Most people refinance to get a lower interest rate, shorten their mortgage term, convert from an adjustable-rate mortgage to a fixed-rate mortgage, and tap home equity to raise funds during financial emergencies.
Refinancing your mortgage is a move that can either help your financial situation or worsen it. However, more people are drawn to the idea of refinancing due to its benefits.
A homeowner with a refinanced mortgage can expect the following: more predictable costs, a shorter term, consolidated debts, and canceled mortgage insurance. All are risks but can become beneficial from the borrower to borrower. If you are having trouble deciding whether to refinance or not, seek professional advice from the people who know about it inside-out. ACB Mortgage Solutions helps clients take the best path for their financial growth. Through our system that caters to every financial situation, it will be easier to decide if itâ€™s the best move for you. Schedule an appointment today, and letâ€™s discuss the solution to your problems.