When is the Right Time to Refinance Your Mortgage?
Mortgage rates have been at historic lows for years, but with the post-pandemic economic uncertainty and possible inflation looming, there's been a scramble for homeowners considering refinancing.
A super-low rate is definitely tempting—after all, lowering your rate can shave a nice chunk of money off your monthly payment—but refinancing does have a cost; fees can range from 2% to 5% of the loan amount, so in order to know if you can recoup your expenses, there are a few considerations you need to make.
Here's how to know when the time is right for refinancing.
When you gain enough equity to get rid of PMI.
Private mortgage insurance, or PMI, is a cost homebuyers typically carry when they purchase a home with less than 20% down. To not pay PMI, you must pay down enough of your mortgage so that you owe less than 80% of what the home is worth.
A refi can help you get rid of PMI if your home has appreciated considerably and prices are on the upswing in your neighborhood because you'll be recalculating what you owe based on your home's new, higher value. Say for example you put down 10% to buy your home, you have PMI, and your home has appreciated 15%. You would now have enough equity to qualify for release from PMI.
Be aware that this strategy may not work for recently purchased homes, as many home loans have a seasoning requirement where you must wait at least two years before you refinance.
When you want to change the loan you have.
Homeowners with adjustable-rate mortgages (ARMs) should definitely keep an eye out for refi opportunities. ARMs offer attractively low fixed rates for usually 5 or 7 years, but then reset to the current mortgage rates once that initial rate expires, so it makes sense to plan for a refi sooner than later, especially if rates seem to be rising. When you've identified an attractive rate, refinancing can allow you to lock in at a 20- or 30-year fixed-rate mortgage.
Homeowners who want to save on interest rates and pay off their loans faster can benefit from refinancing. Simply going from a 30- to a 20-year mortgage can save you tens of thousands of dollars in interest payments over the life of the loan.
When your financial health has majorly improved.
If your financial picture has improved since you purchased your home—say you've paid off a major debt, gotten a higher-earning job, and improved your credit—then you would likely qualify for a more attractive interest rate that might make a refi worthwhile.
When you know you are going to be in your home for several years.
Because of that 2% to 5% closing fee associated with a refinance, your new loan will take time, usually a few years, to recoup that expense and break even. If your plans are up in the air or you may be facing a relocation, refinancing might not be the best cost-saving option.
Mortgage rates are changing daily, and a refinance could be the ticket to more financial ease, less stress, or a shorter loan term. Chat with a Lennar Mortgage consultant and find out what your future payments could be like.