Unless you’ve been living under a rock, you know that interest rates are incredibly low and have been so for some time. Since change is inevitable, you may be wondering if you should refinance now before they go back up.
At the same time, you know that refinancing may not be right for every situation. How can you tell if refinancing is right for you? Here are some indicators that you may be a perfect candidate.
1. Your credit score rocks.
If your credit score is high, you can qualify for a lower interest rate than most people. That means that even if the average mortgage rate is near the rate you are currently paying, you may still qualify for a rate that makes the re-fi worth the effort.
2. You currently have an adjustable rate mortgage (ARM).
Having an ARM is a pretty big gamble. After all, interest rates won’t stay at current low levels forever. You chose the ARM for its low rate, but today’s rates are still low. Locking in a fixed rate now could save you lots of heartache when your ARM is scheduled to adjust.
3. Today’s rate is at least two points lower than your current rate.
Most experts advocate waiting to refinance until you can drop at least two percentage points, but that advice should be tempered with logic. For example, if you know you will move in a few years, then refinancing doesn’t make sense even if the rate is low. Conversely, if you have a “jumbo” loan, then even one percentage point can make a huge difference over the life of the loan. Use the two-point advice as a rule of thumb, and then crunch your own numbers.
4. You have plenty of equity.
The more equity you have in your home, the better your chances of securing a low interest rate. Of course, a lower interest rate is the driving factor in deciding if now is the time for a re-fi.
5. You can afford a slightly higher payment.
If you can afford it, you can save some serious money by shortening the term of your loan. For example, if you originally financed $150,000 for 30 years at 5 percent, you’ll spend about $140,000 on interest over the life of the loan. If you refinance your remaining equity, perhaps about $145,000, for 15 years at 3 percent, you’ll spend about $35,000 on interest, saving around $105,000. However, your monthly payment will rise by about $200.
6. You could consolidate debt.
If you took out a home equity loan or a home equity line of credit early in your home ownership, then it may be time to refinance, especially if your home equity loan had a short “teaser rate” that has since risen. Home equity lines of credit have variable rates, so refinancing to consolidate this debt into a fixed rate is a great idea.
If your situation falls into one of these six categories, then now may be the right time to refinance your mortgage. Why not find out how much you could save?