What to Consider When Thinking About Refinancing
There are a number of potential benefits to refinancing. First, in order to refinance your current mortgage, you’ll go through the mortgage application process again from start to finish. The new loan will pay off your present one, and you’ll have a new set of terms for the loan.
Here are some ways this can be helpful.
To lower your interest rate. Mortgage interest rates fluctuate. If you bought your home at a time when the rates were much higher than they presently are, refinancing could save you money. Keep in mind that if you are 15 years or more into your mortgage, it may not be worth the effort and closing costs.
Pay your mortgage off faster. If you are a few years into your mortgage and refinance from a 30-year loan to a 15-year loan, you can reduce the amount of time necessary to pay the loan off. While it can save you money from interest payments, keep in mind that this option tends to increase your monthly payment.
Change the terms of the loan. If your original loan is an adjustable rate mortgage, the interest rates can go up or down with time. Refinancing your mortgage to a fixed-rate loan can keep your payment amount consistent throughout the life of the loan. If this stabilization gives you peace-of-mind, refinancing may be worth it.
Use better credit for better terms. If your credit is in a better place than when you first bought your house, refinancing your mortgage could mean better interest rates and less out of your pocket each month.
Before You Refinance
It’s important to look at pros and cons before you choose to refinance.
Find the break-even point. Make sure that the costs you have to pay to refinance don’t negate the amount you will be saving. Divide the closing costs by the amount you expect to save each month to find out how long it will take to get to the break-even point. If it will take as long as, or longer than you plan on staying in the home, you may not want to refinance.
Consider how long you plan on staying put. If you are planning on selling your home within the next 10 years, the amount you are paying for closing costs will likely negate any savings you may incur.
Use a mortgage refinance calculator. Use an online refinance calculator to estimate how a new mortgage would compare to the one you presently have. This calculation is only an estimation based on current trends, but it can give you an idea of potential savings – or how much more you’d have to pay – on a refinanced loan.
Other Things to Consider
- Is the interest rate you will be committing to low enough to save you money in the long run?
- Consider how a new mortgage will affect your credit score. While shopping around, the loan companies will show as a “hard inquiry” on your credit account. When there are multiple inquiries, your credit could take a short-term dip as a result. Once you sign the new loan, it could also cause a quick dip in the score as a new addition.
- Speak with a mortgage professional and have them walk you through any fees or other additional costs you may incur by refinancing.
Please note, membership is required to accept a DCU mortgage.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
