Refinancing your home loan can be a smart financial move if the time is right. Below, we will offer some guidance to help you determine if the time is right for you. We will also discuss the potential benefits (and also the drawback) of refinancing your mortgage by asking and evaluating the following questions:

Are Interest Rates Dropping?

Though there are certainly other reasons that people refinance, one of the most common reasons is to take advantage of lower interest rates. When you refinance and lower your interest rate, you may be able save money on your monthly payments and/or pay off your loan faster. This seems obvious, sure, everyone knows it’s a great time to refinance when you can lower your interest rate and payment, so within this question, let’s explore a few sub-topics and try to answer some of the questions we are most commonly asked:

1) If I can lower my rate and significantly reduce my monthly payment, is now the time to make the move to refinance? Often times, the answer is “Yes!” However, if you think it’s likely that rates will continue to move down in the coming weeks, perhaps it makes sense to sit tight a bit longer in a falling rate environment – we don’t always recommend refinancing even if the new rate and payment is improved if we think you might be able to do even better in a few weeks or a couple of months.

2) Do I want to reduce my loan term when I refinance? When the current market offers lower rates, many home owners will choose to lower their rate and payment – yet some will opt to lower their rate to reduce the number of years it will take to payoff their mortgage instead. In some circumstances, if the 15-year rate on a given day is substantially better than your current rate, you may be able to do both. Achieving a lower rate, lower payment, and a 15-year term is more likely if you’ve already been paying your current loan for 10 years or more. We also note that 15-year rates are often lower than 30-year rates, though just how much lower is hard to predict; the spread between the two mortgage terms will fluctuate as the prevailing rates on each term move up or down each day – there is no fixed spread mandated between the two terms and they sometimes move up or down at different velocities (or even in different directions) on any given day.

3) Do I need to see at least a 1% reduction on my current rate to make refinancing worthwhile? The answer is a resounding, “Maybe!” It depends on your plans for the future and your current loan balance. For example, Family “A” has a $200,000 mortgage balance and plans to sell their home and move in 3-5 years, consequently they will likely pay roughly the same amount in closing costs if they refinance as they will save in monthly interest in that 3-5 year window – even with a full 1% reduction in rate – meaning it’s probably not worth refinancing. Family “B” has a $600,000 loan balance and intends to remain in their home for at least the next 20 years. They would save tens of thousands more in interest over their 20+ year period with even a ½ percent reduction in rate. Furthermore, because many of the costs to refinance are fixed, Family “B” is unlikely to pay 300% of what Family “A” would pay to refinance, in fact, the difference in costs to refinance their two mortgages will likely be far less than 3X. Since the costs to refinance are not dramatically different, and the savings are [as a result of the substantially different time frames and different loan balances], you can see that using the 1% reduction as a rule of thumb isn’t very helpful.

Do You Want to Switch to a Fixed Rate Mortgage?

If you presently have an adjustable-rate mortgage (ARM), you may want to consider refinancing to a fixed-rate option. By changing it to a fixed-rate mortgage, you can lock in the security of a consistent interest rate for the life of your loan. If you currently have an adjustable-rate mortgage, you may want to explore switching to a fixed rate. The considerations discussed in the paragraphs, above, may weigh into this decision. Though so will the added emotional benefit of feeling safe and prudent with a fixed rate loan often also plays a part.

When You Want to Tap into Your Home Equity

If you’ve built up equity in your home, as many Americans have over the past several years, you can refinance your home loan to tap into that equity. This is known as a cash-out refinance. You can use the money you receive from the refinance to pay off high-interest debt, make home improvements, or cover other expenses such as college tuition for your kids.

When Your Credit Score Has Improved

Your credit score is perhaps the most significant personal factor to influence your mortgage’s interest rate. If your credit score has improved dramatically since you took out your home loan, you may now qualify for a lower interest rate even if the prevailing market rates haven’t moved down substantially.

When You Want to Remove a Co-Borrower from Your Loan

When taking out a mortgage with a co-borrower, both of you are responsible for repaying the loan. However, if you no longer wish to be financially linked, consider refinancing to remove one borrower from the loan.

If you’re considering refinancing your home loan, Harborside Home Loans can help you navigate the process and find the best loan options for your unique needs and goals. Contact us today to speak with a mortgage professional and learn more about how we can help you save money on your monthly payments and achieve your homeownership dreams.