Many homeowners choose to refinance their loans, whether to get a better rate or to reduce the length of their mortgage, but how do you know if and when you should pursue a new loan? It’s a big decision, and not one to be entered into lightly. Luckily, there are a few key guidelines that can help even the least financially savvy homeowners navigate the process.
Watch The Rates
The simplest indicator that it may be a good time to refinance your loans is that there is a lower interest rate available. That’s not to say that you should refinance every time rates go down, but if mortgage rates are rising, you don’t want to take on more debt by increasing that rate. On the other hand, you don’t want to refinance too soon, either. Often, when rates are going down, they’ll continue to go down for some months, before going up again. Keep an eye on overall economic trends and make a reasoned prediction about rates before you look to refinance.
Consider Your Timeline
In addition to seeking a lower interest rate, another common reason that people choose to refinance their mortgages is because they want to pay them off more quickly. Since initial mortgages are usually for 25- or 30-year terms, those who’ve gained earning power and paid down a chunk of their debt may want to shorten their mortgage term. By taking out a shorter-term mortgage, even if the rates haven’t gone down, homeowners can save money by paying less interest.
Because you don’t want to refinance your home loan too frequently – it costs money to do so that will eat into your savings – it’s important to time this process right. There are resources to simplify the refinancing process that can help you evaluate your overall savings and determine if this is the right time to refinance your loan.
Changing Circumstances
The first rule of refinancing may be to watch mortgage rates, but it’s important to understand that interest rates aren’t borrower neutral. If you had a lower credit score when you applied for your mortgage, you may not have qualified for a very good rate. If, at this point, your credit score has improved significantly, you can get a better mortgage rate just based on that change.
A Matter Of Goals
The right time to refinance a home loan may depend on interest rates and credit scores, but there will also be some complex, personal mathematics in play – you need to understand your own financial goals. If, like most people, you primarily want to lower your monthly bills, getting a lower interest rate may be motivation enough.
In other cases, though, people refinance their homes in order to access accrued value – they want to use that savings toward home improvement or other expenses. When that’s your goal, the right conditions to refinance may look a little different. Consulting with a financial advisor can help you make the right decision.
Mortgage rates follow complex trends, and depending on the type, size, and length of your mortgage, you’ll benefit from refinancing at different times. Use all the resources at your disposal and when in doubt, wait. Good rates will come around again, but the wrong choice can significantly impact your financial future.
