Refinancing your mortgage can offer you some serious benefits. But finding the right time to do so isn’t as simple as throwing a dart at a calendar (how great would that be?).
Knowing when to refinance is part art and part science. Interest rates, home values, and future lifestyle changes are all important, but often hard to predict, factors that’ll inform your decision.
So should you refinance? We can’t give you a firm answer here. But we can give you the 5 ingredients that usually make up a successful mortgage refinance – because every little bit of help, well…helps.
1. A couple pounds of clearly defined goals
A refinance is a means to an end, so a successful one begins by understanding what your objective is. People typically refinance because they want to:
- Lower their monthly payment
- Get cash out for major expenses
- Shorten their loan term
And depending on your own circumstances, these could all be viable reasons to go through with that refi – that’s especially true as rates remain near historic lows. The most important thing to keep in mind, however, is what you want to accomplish with this refinance. It’ll affect every decision you make.
2. A few cups of equity built up in your home
Equity breaks down into a simple equation:
(Your property’s current market value) – (The amount you still owe on your mortgage) = Equity
Higher equity in your home puts you in a better position for a cash-out refinance, where you’ll get a new loan with a larger principal and pocket the difference in cash.
There are two ways your home’s equity can improve. First, if prices are on the rise, your home’s value may appreciate naturally over time (meaning all you can really do is wait). But if you’d rather take a more active approach, completing renovations with high returns on investment might also increase your home’s value.
Therefore, equity is your friend. Make sure you account for it when thinking about refinancing.
3. A sprinkle of understanding your break-even point
Like a purchase loan, you will have to pay for closing costs when you refinance. If you recoup you closing costs in interest savings, you’ll have reached the “break-even” point.
A refinance could make more sense when you plan to stay in your home past this point, or you’ll risk losing money on the refi.
How do you figure out this break-even point, you ask? Start by using a home mortgage refinance calculator.
This applies most to you if you’re refinancing to lower your monthly payments. Be forewarned, rates may be near historic lows now, but could rise in the future. It might benefit you to refinance your mortgage based on today’s rates, not where rates may or may not go in the future.
4. A dash of short- and long-term perspectives
With a refinance, you have the option to use an entirely different loan with a new term. Sometimes the term is shorter, sometimes it’s longer. And even if you refinance to a lower rate, extending your loan term may mean that you’re spending more over the life of your loan.
Again, this goes back to what you want to accomplish with your refi. A successful refinance accounts for your goals in both the short and long term. Start by running the numbers to get a better understanding.
5. A solid credit score to taste
Your credit score can have a direct impact on the rate you get for your refinance home loan. Usually, lenders will offer borrowers a better rate if they have better credit because of the lower risk. That matters for your refinance.
It may be time to break bad credit habits like making just the minimum payment each month, or carrying too high of a utilization rate, among others. These can all negatively affect your credit score, and consequently, put the benefits of a refinance in jeopardy.
On the flip side, there’s also potential for good news. If you’ve done work to improve your credit score, you may be offered a better rate and be able to lower your monthly payment more significantly with your refinance.
When you add this final ingredient to the rest, you’ve likely got one delicious and successful refi. Of course, pinpointing exactly when to refinance is different for everyone. Lining up your pantry of knowledge and preparation, however, might put you in the best position when the time is right.
There’s just one final step. You have home loan options with different features and benefits to consider. Check out your choices here to learn more: Your Refinance Loan Options.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.