Owning a home comes with a lot of advantages, like having the options to change things as you choose.
But there’s more to homeownership than material possession. You also have to consider how your mortgage affects your monthly finances.
Whether you just bought your home or you’ve been paying on it for a while, there are several options available to keep your finances in check. After all, you want to be sure you’re not only getting the best payment but also the best interest rate and term.
And, in a fluctuating market, it can be difficult to answer the question: When can you refinance your home?
If you’re asking yourself this question, you’ve come to the right place.
So, when can you refinance your home?
The answer isn’t always simple. In this post, we’ll discuss some common options.
Switching Loans
One reason to refinance your home lies in the type of loan you already have.
For example, let’s say you have an Adjustable Rate Mortgage, also known as an ARM. You may want to refinance to a fixed rate mortgage to save money on interest.
ARMs are great loans if you don’t plan to stay in your home for very long. But over the long haul, they can cost you thousands in interest when rates fluctuate.
Understanding the answer to the question, when can you refinance your home, goes beyond ARMs. You also need to make sure your current lender doesn’t have an early payoff penalty.
And, in some cases, you can’t refinance until you’ve paid on your mortgage for at least one year.
FHA Refinance
A lot of first-time home buyers prefer an FHA loan for their first mortgage. They can get away with lower down payments or even no down payment.
But over the life of the loan, you’ll be required to pay annual premiums. These are built into the loan payments if the equity in your home is below 20% of the value.
When can you refinance your home? You can streamline your FHA loan without verifying income, employment, or credit as long as you’ve paid on your mortgage for at least one year.
Conventional Loans
Refinancing to a conventional loan is a popular way to save money over the life of the loan.
But be aware of closing costs that can be anywhere from 2% to 5% of the loan value. That means for a $100,000 mortgage with 3% closing costs, you’ll be forced to bring $3,000 to the closing table.
Make sure the refinance will benefit your monthly payment, interest rate, and term before making a decision.
Lowering Monthly Payments
Of course, lowering your monthly payments is a great reason to refinance. You can use the savings to pay off debt or keep more cash in your pocket for other expenses.
It’s important to consider how much you’ll save each month with lowered payments while also paying attention to the upfront costs.
Remember the closing costs mentioned above? If you’re not saving money over the life of the loan with the lowered payments, the refinance might not be worth it.
Faster Payoff
Some people simply don’t get along with their lender.
In this case, refinancing is a great option to pay off the mortgage and sign on with a different lender.
Of course, to avoid additional costs, you should first check that your current lender doesn’t have a pre-payment or early pay-off penalty.
Rate-and-Term Refinancing
One of the most popular reasons that people refinance their homes is to get a better rate and term.
Your rate is based on your credit score at the time you purchased your home. Terms are generally pre-determined based on the type and amount of the loan.
If you’ve improved your credit or you’re looking to pay your home off sooner, a rate-and-term refinance might be the right option for you. Lowering your rate could decrease your payment, but if you change your terms it might go up.
Make sure to consider the pros and cons of each scenario to be sure a refinance is the best option for your financial situation.
Cash-Out Refinancing
Cash-out refinancing is another option you can choose from when refinancing your home. You can use the equity in your home to take cash out for a large expense or stash it in savings.
A few reasons people take the cash-out refinancing option are:
Debt Consolidation
Credit card debt, especially, can become burdensome and overwhelming. High interest rates may make it seem impossible to pay off the debt.
With a cash-out refinance, you can use the cash to pay off existing debt while keeping a similar payment on your mortgage.
Remodeling
Want to build more equity in your home? Use a cash-out refinance to pull money from your existing equity to add-on or remodel your home.
Many types of remodels will add value to your home. You can rest assured that your refinance will pay for itself over the life of the loan.
So, When Can You Refinance Your Home?
The choice to refinance your home boils down to your own personal financial situation. Make sure to weigh the pros and cons of each option available to ensure you’ll actually be saving money, not spending more.
And, if you’re paying off debt, make sure to watch your spending. You don’t want to get stuck in a debt cycle that can eventually lead to bankruptcy.
The answer to the question, when can you refinance your home, is unique for everybody. Your reasons for refinancing may reflect in your decision to refinance now or later.
Of course, there are other options available if you’re simply trying to consolidate debt or make other large purchases.
If you’re not sure refinancing is right for you, or if you have questions, contact our customer support teams. We specialize in various loans to help get you back on your feet again.