Although interest rates on home loans are meager, should you refinance? When is the right time to do it? It isn’t always straightforward because obtaining a new loan isn’t always free. There are costs that the homeowner must bear.
It would be best if you considered the change in interest rates, the loan length, and the closing costs. After that, it’s just easy math.
The following are the primary aspects to consider:
1. How much have interest rates reduced compared to your current loan?
Remember that if you borrowed $750,000, a 1% decrease in interest rate is likely to mean more than if you borrowed merely $40,000. Examine the difference in your payments and determine how much you will save in the long run.
2. What is the loan term?
It won’t matter as much if you only have five years left on your mortgage as it will if you have 27 years left. It’s feasible that you’ll lose money in the first situation and gain a fortune in the second. Again, consider how much money you will save each month versus the cost of acquiring the new loan.
3. Can you take a shorter-term right now?
Consider the possibility that you can now handle a shorter period. If you can cut your existing loan from 23 years to 15 years, you could save a lot of money. Even if your monthly payment does not drop, making payments for eight years less could save you a lot of money.
4. What are the acquisition or closing costs?
Banks tax you for borrowing their money, and we’re not just talking about interest. There are expenses for credit checks, appraisals, origination fees, and much more in a mortgage refinance. Find out what these fees are from your lender and factor them into your estimate.
The idea is to compare your present loan and associated payments to the new loan and acquisition fees. Remember to factor in the loan’s term in your calculations.