Evaluating Equity: Knowing the
Right Time to Refinance Your Home
home equity articles and tips
If you think that you can improve upon the terms of your current mortgage, refinancing may make sense. However, there are a number of variables that you need to consider before you start talking to a lender about a new mortgage. How do you know if now is the right time to refinance your home loan?
How Much Equity Do You Have?
Lenders won't even talk to you if you have less than 20 to 30 percent equity in your home. They probably won't be open to a big loan or give you the best interest rates if you have a loan-to-value ratio of between 31 and 65 percent. Therefore, refinancing may not be in your best interest unless the value of your home is at least twice as much as what you owe on it.
Are Interest Rates Attractive Enough to Refinance?
According to the experts at Republic State Mortgage Co, the best time to refinance a loan is when you can get a lower rate that what you are currently paying. For instance, if your current interest rate is 5 percent, you don't want to refinance if current rates are 6 percent. This is because you will actually pay more each month to service your home loan, which puts you at a financial disadvantage. Ideally, you should only refinance if it helps you pay for your home faster or allows you to free up cash to pay bills or contribute to your retirement.
Don't Forget to Account for Closing Costs
When you refinance your loan, what you are actually doing is getting a new mortgage. The old loan is paid off with proceeds from the new loan, and you then start making payments based on the new agreement you have with your lender. Since you are getting a new mortgage, you may have to pay some or all of the same closing costs that you did when you first bought your house. Therefore, you need to make sure that the amount you save over the course of the new deal is more than what you pay to obtain it.
Only you know if right now is the best time to refinance your mortgage. If you need help making the decision, it may be a good idea to talk to a financial professional who can show you the pros and cons of any choice that you may make. You may also want to use online calculators that can help you create a plan that helps you solidify your financial future.
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