Buying a home means getting a mortgage, but getting the bad end of the stick when it comes to the interest rates means you have to pay more out of pocket. Fortunately, some solutions can help save you money down the line.
Refinancing a mortgage seems like a counterintuitive idea. Paying off an existing loan and buying off a new one seems like it will burn more holes into your wallet, but when done right, it means paying cheaper interest payments over a shorter term.
Not all situations call for it as it can also burn through your cash, but the list below explores different reasons refinancing your mortgage is the right step for you:
1. Refinancing Improves Your Mortgage Rate
If you see an opportunity to lower the interest rate by at least two percent, then it can serve as a compelling incentive to refinance your mortgage. Not only will this secure a better mortgage rate, but it will also improve your home equity in the long run. On top of that, refinancing can even shave hundreds to thousands of dollars off your monthly payment.
Keep in mind that the interest rates are on an all-time low due to the pandemic this 2020, reaching an average rate of 3 percent on 30-year fix-rate refinances to 2.50 percent on 15-year fixed-rate refinances. It’s best to consult with a professional to make sense of your refinancing options.
2. Refinancing Shorten the Loan’s Term
Another reason to refinance your current mortgage is to make the most of the downward turn of the interest rates in today’s housing market, allowing you to switch to shorter loan terms without significantly affecting your monthly payments.
This means refinancing can turn a 9 percent interest rate to 5.5 percent, which cuts a 30-year fixed-rate mortgage down to half. Putting the concept into numbers, a monthly payment of $805 will only see minimal changes, going up to $817 at the most.
3. Refinancing Allows You to Cash Out on Your Home Equity
Every home rises in value over time, and the build-up is known as your home equity. Refinancing creates an opportunity to take advantage of the rising value, making it possible to convert it into cash to cover your current needs.
It’s better to talk to a mortgage professional when going down this route as it can also compromise your home’s equity, so having an expert weigh your options should help determine whether it’s the right move for you.
The Bottom Line: The Best Times to Refinance Your Mortgage
Keep in mind that you need to consider your situation before deciding on a money-saving solution when it comes to your mortgage. So long as your total monthly savings can offset the expenses you need to pay in refinancing, it’s a good choice since it can help lower your interest rate and overall monthly payment.
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