If you see mortgage rates dropping in 2024, you may consider refinancing your home. But whether you should do it depends on many factors. It could be logical to pursue a home refinance in these scenarios:
- You are able to refinance your fixed rate home mortgage into a lower fixed rate program, and refinance with zero closing costs.
- A major charge in market conditions, such as a significant change in rates or a rise in home prices, makes it beneficial to refinance.
- You are able to use a cash out refinance to pay off high interest debt, make major home improvements, etc.
Refinance Your Home or Not?
Are you still unsure if you should refinance your house? Many people feel the same way. Even when rates drop significantly, the decision to refinance your home mortgage can be uncertain at best. One of the problems is that the rules of thumb we have learned about when to refinance do not always make sense.
So, homeowners may refinance when it does not make sense, and do not refinance when they should.
When Should You Consider Home Refinancing?
Refinancing can be a suitable choice under certain circumstances, but it may not be the right solution for everyone.
Consider the following potential reasons to refinance your mortgage:
- Decreasing long-term interest costs by securing a lower mortgage rate, opting for a shorter loan term, or combining both strategies.
- Lowering your monthly mortgage payment by either reducing your interest rate or extending your loan term.
- Eliminating mortgage insurance (PMI).
When contemplating these options, it’s crucial to factor in the associated closing costs, such as the origination fee, appraisal fee, title insurance fee, and credit report fee.
Typically the refinance closing costs range from 2% to 5% of the loan amount, these costs should be weighed against potential savings.
If you just need money and already have an interest rate below 5%, it may make send to take out a HELOC loan so you can write checks from home’s equity without losing your low rate mortgage. These 2nd mortgages offer competitive interest rates and potential tax benefits.
To determine the break-even point, where the savings from a lower interest rate surpass the closing costs, you’ll need to calculate the closing costs and divide them by the monthly savings resulting from your new payment.
Is Now the Best Time to Refinance Your Home?
The advantages of mortgage refinancing vary based on eligibility and the type of loan available. Potential benefits include:
- Lower Interest Rate and APR: Refinancing can secure a reduced interest rate compared to the original loan. (rate-and term refinance)
- Reduced Monthly Payment: The possibility of a decreased monthly payment is another potential advantage.
- Shorter Payoff Term: Refinancing may offer the option to shorten the payoff term, allowing for faster loan repayment.
- Get Cash-Out: There’s the potential to cash out equity for other purposes, enhancing financial flexibility.
Home refinancing involves obtaining a new loan on the property, usually for the outstanding balance, with the aim of securing more favorable terms. The success of this endeavor depends on factors such as current mortgage rates, the level of equity in the property, and the credit score during the application.
Despite the promising aspects of refinancing, it may not always lead to an improved financial position. It’s crucial to assess the pros and cons carefully, considering individual circumstances before making a decision.
Home Refinance Overview
Refinancing your mortgage means replacing your current mortgage with a new loan. With the refinance, the balance of your current loan is paid using the balance of your new mortgage loan. When the refi is done, the old loan no longer exists. It is replaced with an entirely new mortgage with new terms.
There are many good reasons why homeowners want to do a mortgage refinance. A homeowner may want to exploit changes in the mortgage market, including a sudden drop in rates. A new loan can provide you with a much lower rate and payments, and may get rid of pesky private mortgage insurance or PMI.
In other cases, the homeowner may refinance to pull out cash for a home improvement job, to fulfill some type of legal obligation, such as take your ex-spouse off the loan. There are literally dozens of reasons why you might want to refinance. But the most common ones are to drop the rate and drop the monthly payments.
As you consider a mortgage refinance, define what your primary goal is first. Determine what you are attempting to accomplish. Then, think about all of your possible mortgage refinance opportunities.
For example, if you have an FHA loan, you could refinance it with the FHA Streamline Refinance program. This does not require any income, assets or credit verification. Nor does the home need to be appraised. This is an easy way to refinance if you just want to get a lower rate.
Or, consider doing a refinance from FHA into a conventional mortgage that could allow you to cancel FHA’s expensive mortgage insurance.
The Flaw of the Break Even Method
When you mulling a refinance, many financial experts will have you consider the ‘break even method.’ This determines the number of months it takes to get back the costs of the refi. Then, you decide if you will have your home loan for more or less than those months.
Thus, if your loan payment now is $1500, and your payment after the refinance is $1400, and you have $1000 in closing costs, you can figure out the break even in this way:
- Refinance cost: $1,000
- Savings per month: $100
- Break even point: 10 months
If the break even point for the new loan is 10 months, and you want to keep the loan for a year, it could make sense to refinance. But if you have been in your current loan for years, the break even calculation may not add up. The problem is related to the new starting balance on the loan. This is lower than what the beginning balance on your existing loan several years ago.
Your new starting balance is lower than your old one. Because a mortgage payment is the same every month, you will get a reduction in payment from the restart of the loan.
Zero Closing Cost Refinance
Another good time to refinance is when you are refinancing a fixed rate mortgage into lower rate product and have zero closing costs. The lender pays all the closing costs. In exchange for a mortgage with no closing costs, you pay for a slight increase in the mortgage rate. This does not give you the lowest possible rate, but you still can save money on your rate and not pay up front money.
If you think that extending your mortgage a few more years is an uncomfortable prospect, you do have the right to pay as much of your loan each month as you like. You can keep sending the previous mortgage payment on the old loan to the lender, and the new mortgage will be paid off faster.
Summary
Potential savings in interest, potentially amounting to thousands of dollars, can be achieved through refinancing, especially when securing a lower interest rate. This holds particularly true when maintaining the same loan term. For instance, if you choose to refinance a 15-year loan into another 15-year term, a reduced interest rate will lead to a decrease in your monthly mortgage payment.
Deciding if house refinancing is for you can be tricky. But there are ways to determine if a mortgage refinance fits your personal and financial goals.
References
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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