There are many reasons you may be considering refinancing a home loan. Refinancing may allow you to get a lower interest rate, shorten the term of your mortgage, switch between an adjustable-rate mortgage or a fixed-rate mortgage, use your home’s equity in order to finance a large purchase or consolidate debt. However, refinancing can be risky and you might not always attain the goal you were aiming for.
One of the most important aspects to consider when refinancing is the timing. So how do you tell if now is the right time to refinance?
Do The Calculations
Getting a better interest rate or shorter loan term can seem very tempting, but it’s important to do the calculations to ensure that refinancing will be beneficial for your situation. Look at each option to see how much it will save you either in monthly payments or total repayment, as well as taking into account the term. Then balance this with the costs of refinancing to see if it’s the right choice for you.
Interest Rates Are 1-2% Less Than Your Loan Rate
Many brokers recommend that if interest rates are 1-2% below the current rate on your loan, you should consider refinancing. If I refinance my mortgage for a lower interest rate, it means I can reduce monthly payments and increase the rate I add equity to my home.
Shorten Your Loan’s Term
Refinancing can also offer you a way to trade in your current loan for a loan with a shorter term, provided that the interest rates have fallen. This means you can pay off your home loan sooner and build equity faster, both of which are sound financial moves.
Converting Between Fixed Rate and Adjustable Rate Mortgages
If interest rates are low, you may want to lock in that rate by swapping from an adjustable rate mortgage to a fixed rate mortgage. Likewise, if I initially took out a fixed rate mortgage at a higher rate, I may want to refinance my mortgage to a lower fixed rate or even an adjustable rate to take advantage of this. This can be a good idea if interest rates are falling, or you’re only planning to stay in your home for a few years, but if there’s uncertainty it may be better to lock in a low rate.
Accessing Equity Or Consolidating Debt
Refinancing to access equity for a big ticket item (like home remodels or children’s college funds) can seem like a good investment, you will be creating more debt to pay off, so it’s really important to weight up all the consequences of this decision before diving in. Likewise, refinancing to consolidate debt may not be the best idea unless it comes with measures to begin reducing your debt and preventing further debt from accruing.
While low interest rates can provide the ideal conditions to access equity or consolidate debt, it’s important to carefully consider the financial implications.
Is Now The Right Time to Refinance my Mortgage?
If current interest rates are lower than the rate on your current loan, it’s a good idea to speak with a mortgage broker about your options. Interest rates are relatively low but could be set to increase, so it’s important to act fast.
Refinancing is an individual process and your unique situation really needs to be taken into account. Talk to your local mortgage broker to find out more about your options for refinancing.