Refinancing is not for everyone
If you have an extremely low mortgage balance, or you only have a few years left on your mortgage, it might make sense to stay where you are — even if your rates aren’t the exceptionally low rates we’re seeing right now.
That’s because refinancing costs money. These costs vary for a number of reasons, but the average amount you’ll pay to refinance is 2% of the loan balance. Application fee, appraisal fee, property rights fee and so on will eat up the money you could have saved. If you only have a few years left, a mortgage refinancing can be a bad deal.
Look at refinancing as a whole
It’s also important to note that the best refinancing for you may not even lower your monthly mortgage amount. In fact, it may increase. You can opt for shorter terms and lower interest rates. A 15-year loan, rather than a 30-year one, may be best for your particular situation. Shorter terms mean less interest payments overall and you can get out of your mortgage more quickly.
Even if you may not be saving every month, paying off your mortgage in less time is still a decisive win.
Tired of paying PMI? Refinancing can help eliminate it
Refinancing may also be the perfect opportunity to ditch PMI(private mortgage insurance). Assuming you bought a house a few years ago and are still paying PMI, refinancing, in addition to getting a lower interest rate, can help you get out of your monthly mortgage payments. Since home prices have soared over the past few years, most homeowners should have no problem appraising their homes to a point where THEY no longer need PMI.
If you can pull off the double whammy of lowering interest rates and cutting PMI, then refinancing makes more sense for you. Some borrowers may find themselves saving $400 or more a month at a stroke.
Make your own finances shine
Speaking of personal factors, it’s important to make sure you have your ducks in a row before you start the refinancing process. For example, if you don’t know your credit score, you’ll want to get this statistic.
Any score above 740 is worth fighting for. If you can get your score above the mark, you may qualify for the best rates and terms from most lenders.
By the way, perfection isn’t necessary, so don’t waste your time trying to do the impossible. But pay special attention to your credit score. A subpar score can cost you thousands of dollars.
The savings can be huge
Mortgage rates have been falling sharply. If you didn’t refinance your mortgage in the past few years, you would have made huge gains. Today, the average refinance is just over $350,000.
At that amount, if you can lower your loan by just one percentage point, you’ll save almost $200 a month. That’s a lot of money in your monthly budget!
Still, not everyone can get those savings from refinancing. A lot depends on how long you plan to stay at home and how much the transaction costs.
For example, if your current interest rate is 4% and you can refinance at 3%, refinancing is probably the right move for you, assuming you plan to stay in the home for many years. But if your rock-bottom rate is 3.5%, the chances of refinancing that makes financial sense are much smaller.
Your specific situation may vary
Personal finance is a personal thing. So before you make a major financial move like refinancing, it’s important to consider your personal situation, no matter how good the headlines say refinancing sounds.
Again, if you don’t plan to stay in the house for long, it doesn’t matter if you get a 3 percent rate cut. You can still take a financial hit.
You should also consider your specific financial goals. If you’re prioritizing mortgage debt and plan to get rid of it completely in the next few years, refinancing won’t help much. Instead of pursuing refinancing, direct all of your brainpower and extra income toward that goal.