Low interest rates on mortgages are making many Fox Valley homeowners consider whether their situation is right for refinancing. But there’s more to think about than just interest rates when looking into refinancing.
At what point might you look at refinancing your home?
- Lower interest rates have become available
- Your credit has improved and you are eligible for a lower interest rate
- You would like to switch to a shorter or longer term mortgage
- You would like to access the equity in your home
All of these are good reasons to consider refinancing your mortgage. You can adjust your rate and set yourself into a fixed lower rate, adjust the length of your mortgage or access the equity in your home and add on that sun room to increase the value. The bottom line is working towards building equity and saving money to build your net worth.
Refinancing makes sense if you plan on staying in your current home for more than five years or you are converting between an adjustable-rate and a fixed-rate mortgage when the interest rates and term are more optimal.
When refinancing to lower your interest rate, find out how many months are left on your current amortization and ask to set your new loan terms to match. This will avoid paying interest for extra months and will add up to a big saving over time.
Considering shortening your term on your mortgage is a great financial move because the interest over the life of the loan is significantly less. Ask for quotes on 15 year versus 30 year and you may be surprised how affordable the payment can be, especially if you are paying a higher rate on your current mortgage. The shorter the term of the mortgage will speed up the equity building process.
Life events, for example loss of a job, divorce or paying for college tuition, can happen and it may be necessary to lengthen the term of your mortgages. By doing this, you can significantly add to your monthly cash flow. It would be wise to try to budget yourself on bi-weekly payments and pay a little more each month to reduce the total cost.
Accessing the equity in your home can very rewarding. Using the equity for home improvements is the best way to maintain or increase the home’s value. Many people will access their equity for debt consolidation.
There are typically fees (closing costs) tied directly to refinancing that average from 2-6% of the loan’s principal. Because you are essentially closing out one loan and initiating another loan, these can’t be avoided. When shopping for a refinanced mortgage, look at the difference between your current payment and the new payment to find your breakeven point. Breaking even on your closing cost associated with your refinance in less than 24 payments would be a great goal.
You may consider asking your mortgage lender if their financial institution has “no cost” loans. Typically the rate is slightly higher than the current rate, but in some instances, this may be a good option for you.
Refinancing may not always be in your best interest, though. For instance, if you’ve held your mortgage for 75% of its life because your current balance is lower than where it started and you are close your payoff date, lowering your rate and paying closing cost would not be advantageous. Lowering the interest rate so late in the loan may not have enough benefit to pay for all the fees. If you’re looking to move in a few years, refinancing may not be in your best financial interest either.
When used carefully, refinancing can help you gain control over your debt and build equity faster. Each mortgage situation is unique and should be reviewed by your trusted mortgage banker. If you’re considering refinancing, talk to an FNB Fox Valley mortgage banker in Appleton, Neenah or Oshkosh today.