Is it Time for a Mortgage Refinance?

Have interest rates plummeted after you purchased your home? Are you in a much better financial and credit situation than when you first took out your mortgage? Are you looking for a way to reduce your mortgage or loan payments on a monthly basis? If all of the above apply to you, it might be time to start refinancing your mortgage.

A mortgage refi is a loan taken out solely to pay down an existing loan in order to lower the regular monthly premiums – or the net amount of interest you’ll pay. Refinance mortgage loans become more common as interest rates fall dramatically, but there could be good reasons for you to buy one even though interest rates have stayed the same or risen in general. When do you consider refinancing your new mortgage and how does refinancing your current mortgage reduce monthly payments?

Assume you purchased your home using a local lender’s mortgage loan. You ended up with a marginally higher-than-average interest rate due to your lack of credit history and your decision to put down a modest down payment. Standard interest rates have fallen almost a full percentage point in five years, putting them nearly three percentage points below the average mortgage rate. You’ve been with your new boss for seven years, have lived in the same home for five years, and have a track record of making on-time mortgage and credit card payments. You’re in a great position to refinance your mortgage because:

  1. Your credit score almost ensures you get the best interest rate on new loans.
  2. A three-percentage-point reduction in your interest rate is important. The majority of analysts advise refinancing whether the new interest rate is at least one complete percentage point lower than your existing one. In fact, even a half-percentage-point decrease in the APR will dramatically reduce your monthly payments.
  3. Because of financial conditions that no longer apply, the initial mortgage has a higher interest rate than the average rate.

Another reason you might consider refinancing is to reduce the duration of your mortgage. If you first take out a 30-year mortgage at 5.25 percent APR, refinancing for 20 years at the same APR would substantially reduce the overall rate, though your monthly costs would be higher. Even so, if your financial situation has improved dramatically after you took out the initial mortgage, the net savings could make refinancing worthwhile.

When considering whether or not to refinance the new mortgage, there are many things to weigh. For example, most mortgages have an early payoff penalty. There are also penalties and closure charges to remember before taking out a new loan. Before deciding whether or not to refinance the mortgage, weigh all of the risks of obtaining a new loan against the potential benefits from a reduced interest rate.

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