Over the past year and change, many homeowners have rushed to refinance their mortgages to take advantage of record interest rates. If you haven’t refinanced yet, you may be considering swapping out your existing home loan for a new one at a lower rate.
But what if you already have a low interest rate on your mortgage? Does Finding A Mortgage Lender And Refinancing Still Make Sense?
It’s more than just lowering the interest rate on your loan
It’s true that for many people, the goal of refinancing is to lower the interest rate they pay on their mortgage and lower their monthly payments. In fact, the general convention is that refinancing makes sense when you can lower your interest rate by about 1% or more. But if you have a low rate to start with, it may not happen.
Still, there are other scenarios where refinancing can pay off even if the interest rate on your mortgage doesn’t change that much.
When you want more time to pay off your mortgage
You may have signed a 15-year mortgage thinking you would make those higher monthly payments to get rid of your mortgage debt sooner. But if your other living expenses have increased since you moved in and you’re now struggling to keep up with your mortgage, it might be worth refinancing from a 15-year mortgage to a 30-year mortgage. In this case, you might not get much savings on interest rates, but you should significantly reduce your monthly payments.
When you want to withdraw money from your home
As home values have skyrocketed over the past year, many homeowners are now sitting on more home equity. Refinancing with withdrawal is a good way to leverage that equity and use it to your advantage.
With withdrawal refinancing, you borrow more than your existing loan balance and get the rest in cash. You can then use that money for any purpose, whether it’s to pay off credit card debt, renovate, or take a vacation. Even if you can’t reduce the interest rate on your loan much (or not at all), refinancing with cash can still be an affordable way to borrow and an easy way to access the money you have. need.
Look at the big picture
For many homeowners, refinancing offers the possibility of obtaining a much lower interest rate on a mortgage. But if you already have a low interest rate, this may not apply to you.
If your only refinancing goal is to reduce your monthly mortgage payments, then swapping your current loan for a new one may not produce the savings you want if you already have a low interest rate. This is because you will have to pay the closing costs to finalize your new loan. If you can only lower your interest rate slightly, you could, for example, pay $ 5,000 in closing costs to save $ 50 per month on your mortgage. That means it will take you 100 months to break even, and during that time you could move out, wiping out the potential for savings.
On the flip side, if you need to extend the term of your mortgage or want to take money out of your home, refinancing might make sense even though your interest rate will largely stay the same. It helps to look at the big picture when making your decision.