Is Now The Right Time To Refinance Your Mortgage?
To find the right time for you to refinance, answer these four questions:
1. What’s your interest rate versus the interest rate you could get today?
The bigger the difference between your rate and today’s rate, the more you can cut your monthly payment by refinancing. If you have a $100,000 mortgage:
- At 6 percent, you pay about $600 a month in principal and interest
- At 5.5 percent you pay about $568
- At 5 percent you pay about $537
2. Do you need a more predictable mortgage payment?
If you've got an adjustable-rate mortgage, refinancing into a fixed rate mortgage lets you lock in a rate, This way you know exactly what your future payments will be. You pay a higher interest rate for that benefit.
Lenders also make you pay more for ARMs that don’t reset for a long time. The longer the initial rate lasts, the higher the interest rate.
That's why a 1-year ARM might have a 2.50 percent rate compared with 3.25 percent for a 10-year ARM.
How much risk are you willing to take to get a lower monthly payment? Can your budget handle potential payment increases if interest rates rise?
3. How long do you plan to keep your home?
If you’re in your forever home, then opting for a fixed-rate mortgage locks in your payments for the next 30 years.
If you plan to downsize into a smaller home in a few years, a 5-year ARM will give you a much lower interest rate and monthly payment than a traditional 15- or 30-year fixed rate mortgage.
And if your plans don't change, you’ll sell and pay off the loan before the ARM resets to a new rate in year six.
For each refinance loan you’re considering, your loan officer can show you how much you’ll pay in total during the time you plan to stay in your home.
Also check to be sure you’ll be there long enough to earn back the money you spend on closing costs.
4. Will you get a tax benefit?
If you itemize your tax deductions, the interest you pay on your mortgage may be deductible.
If you take cash out when you refinance and use the money to pay off credit cards or auto loans, you may also be able to deduct that interest.