With rates at historically low levels, you may be tempted to refinance your mortgage, but is that a good idea? Before you take the plunge and call a loan officer, check out these three reasons why you should refinance and see if any of them apply to your situation.
Lower Interest Rate
You can save one or more percentage points over your current rate. Refinancing your loan will cost you money. There are numerous fees and costs associated with a refinance, so it only makes sense to do so if you’ll be saving a significant amount of money. Typically, this means you need to shave 1 or more percentage points off your interest rate to lower your payments to a point where it makes sense to refinance.
If you bought your home in 2008 or prior, it probably makes sense to refinance right now. Rates are historically low, giving many home owners the opportunity to cut hundreds of dollars off their monthly payments. However, many who could benefit from a lower rate don’t have enough equity in their home to refinance. Consider the current value of your home before you attempt a refinance to avoid paying mortgage insurance if it’s determined that you don’t have enough equity in your investment.
Quicker Payoff Date
You can pay your loan off quicker. Taking advantage of lower rates and a shorter loan term can keep your payments the same while allowing you to pay your loan off quicker. Even shaving just 5 years off of the life of your loan will save you a significant amount of money in interest. As a bonus, shorter term loans typically have lower interest rates as well for an even better deal.
Before taking on a 10 or 15 year loan, think about your current tax situation. For many, the mortgage insurance deduction is one of the biggest tax deductions they have. While you may save money by not paying a mortgage payment, the hit at tax time may make you think twice about getting out of your obligations too early.
Unstable Job Market
If you’re in danger of losing your job because of a layoff or a company that’s struggling, now would be a good time to refinance your home. Not only can you lower your payment and thus lower your monthly expenses, most lenders will only refinance if you have a work history of 3 or more years with your current employer. If you get laid off, you may have a harder time refinancing your loan and taking advantage of lower rates. Head to your local lender now before it’s too late.
If any of these reasons apply to you, you may want to start making some calls and seeing what options you have available to you. Refinancing your home can be a useful financial tool that lowers your monthly obligations and frees up more of your money for other needs.