Mortgage interest rates have been hitting new lows this summer. Which leaves many homeowners asking: should I refinance my mortgage?
In July, refinance applications were up 111% compared to last year, according to Mortgage Bankers Association. For homeowners with a higher interest rate, refinancing can mean money saved each month.
Below are some things to consider before refinancing your mortgage.
Reasons to Refinance Your Mortgage
Why refinance a loan? Here are some of the reasons people opt to go through the process:
Lower interest = lower monthly payment.
In 2020, low-interest rates are attracting many refinance applications. If you bought your home during a time when interest rates were high, or if you had poor credit when you first got your loan, refinancing for a lower rate could save you thousands of dollars over the life of the loan.
Change your rate or term length.
Another reason people refinance is to change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. After the initial low-interest term runs out, refinancing to a fixed-rate mortgage secures stable and predictable monthly payments. Others opt to refinance for shorter-term loan length. Switching from a 30-year mortgage to a 15-year mortgage will help you pay off the loan faster.
With a cash-out refinance, the new loan is for a larger amount than the original loan. The difference goes to the borrower in cash, which typically can be used for anything, from home renovations to paying off credit cards. Keep in mind you will have to pay interest on the cash, as well as the refinanced mortgage.
What to Consider Before Refinancing
With historic low interest rates, refinancing seems like a no brainer. But there are some things to consider:
Refinancing costs money. As you close on the new mortgage terms, you will have closing costs, typically between 2% and 5% of your loan, to pay upfront. Consider how long it will take you to break even before you start saving money. If you plan on moving before you break even, refinancing may not be in your best interest.
If you have gained enough equity in your home, refinancing could allow you to cancel private mortgage insurance (PMI). If you are able to cancel PMI and obtain a lower interest rate, you could save a substantial amount each month. In order to cancel PMI, the loan balanced needs to be 80% or less of the appraised value of your home.
Always discuss your options with your mortgage lender to determine what is best for your financial situation.