Money Matters

Is now the right time to refinance your mortgage?

Written by

Jonathan McFadden

Posted

March 15, 2019

If you’ve owned your home for a few years and plan to stay there a while, you might want to consider refinancing your mortgage.

Hear us out.

Mortgage rates are on the rise (they have been for years now) and don’t show any signs of slowing down. Rates dipped at the start of 2019, but economists predict they’ll resume their gradual climb upward as the year goes on, although at a much slower pace.

That said, rates still are at historic lows. Now could be the perfect time for you to refinance with today’s rates before they surge again.

Here are four key reasons you might want to refinance, and the risks and benefits of each.

You want lower monthly payments

Lowering the interest rate on your mortgage is one of the best – and most popular – reasons to refinance. A better interest rate could mean lower payments each month, so long as you secure a rate that’s low enough to reduce how much you pay on your mortgage each month.

For years, the rule of thumb was that you should only refinance when interest rates dropped by 2 percent or more. But in this rising rate environment, some lenders say reducing your rate by 1 percent — even 0.75 percent — is worth it.

Keep in mind that refinancing means using a new loan to pay off your existing one. That means you’re getting a new mortgage. And a new mortgage, just like your first one, will come with closing costs. Depending on your lender (and the state where you live), those fees can be rather high. Examine the costs carefully to ensure you’re not paying wads of cash for something that should relieve your financial burden.

You want a shorter loan term

About 90 percent of American homeowners chose to get a 30-year fixed-rate mortgage in 2016, according to the most recent data available from Freddie Mac. If you’re one of them, refinancing could reduce that loan term from 30 years to 15.

Cutting your loan term in half will speed up your loan payoff date and could save you thousands in interest. Plus, you’ll increase the rate at which you build equity in your home because you’re paying down your mortgage balance faster.

Here’s the rub: Shortening your loan term means increasing your monthly mortgage payment. Because you’re compressing the length of time you’ll have a mortgage, you’ll have to pay more each month to satisfy the loan.

You want a new kind of mortgage

Some home buyers prefer adjustable-rate mortgages (ARMs) because of their attractively low interest rates. However, after a set period of time, those rates begin to fluctuate with the ebb and flow of federal interest rates. That means monthly mortgage payments could go up or down year over year.

If you have an ARM but plan to make your current home your forever home, you may consider refinancing to a fixed-rate mortgage. An FRM will add stability in your budget and shield your loan from the unpredictable rise and fall of interest rates.

On the other hand, you may want to switch from an FRM to an ARM if you don’t plan to live in your home long term. ARMs typically come with substantially lower interest rates than their FRM counterparts. You can refinance to a lower rate and enjoy lower monthly payments without worrying about higher interest rates since you don’t plan to live in your home for a lengthy period of time.

You want to turn your equity into money 

Homeownership has long been praised as one of the primary sources of wealth for most Americans. Why? Equity.

Each month you pay down your mortgage balance, you build equity in your home and equity equals money.

A cash-out refinance lets you swap your old mortgage for a new, larger one, and then get the difference between the two loans in cash. You can use that money however you like — from sending your children to college to paying for a massive home repair.

But like any refinance, cash-out refinancing comes with closing costs, and those costs could range anywhere from hundreds of dollars to thousands. And if you borrow against more than 80 percent of your home’s value, you’ll have to pay private mortgage insurance — another cost tacked onto your new mortgage payment each month.

The takeaway

Depending on your circumstances, refinancing might be the best way to afford your mortgage. But there are pros and cons. Know what you’re getting yourself into so you can make the best decision.

The good news: you’re in the right place for the next step. Shop for refinance offers in minutes here and see what you can get. Searching on LendingTree does not enter you into any agreement or obligation, so get over there and start shopping.