We all understand that refinancing a home can save you money. At least, that is the general idea behind refinancing. Yes, the mortgage refinance rates are a huge deciding factor on when it’s best to refinance a home, but what are some of the other reasons behind why people refinance their home?

What are some good reasons to refinance your mortgage?

Lower your current interest rate.

The best time and reason for refinancing your mortgage is to obtain a lower interest rate. Anything over a 2% decrease in the mortgage rate will be worth considering refinancing the loan. Money FCU is a local lender who knows the current local market and can help you refinance your existing home. Call us for your rate and new monthly mortgage payment today.

Tap equity for cash.

People often refinance when they need to tap their equity to finance a large home project or pay off a debt. Consider the length of repayment and make sure you are not getting in over your head. Remember, refinancing your home means if you can’t repay the loan, the home is in jeopardy of repossession due to non-payment. Make sure that the new investment fits in your budget, and the debt-to-income ratio is still in your favor.

Reduce the loan term.

Reducing the loan term while keeping the same monthly payments will get you out of debt faster and reduce the amount paid in interest.

Convert to a fixed-rate loan or adjustable rate. 

Some people refinance to convert to a fixed-rate mortgage when rates are lower. A fixed-rate will eliminate the possibility of any unforeseen costly interest rate hikes in the future. Other homeowners will actually convert to an adjustable rate when the market is dropping. Doing so is a strategic move made when the market appears to be declining and is likely to continue to do so. A change of this nature makes sense when you have a shorter-term and can play the odds against the rates going back up and costing you more.

Lower interest rate than other loan types. 

Finally, another good reason to do a cash-out refinance is when you need the money from the equity. The interest rate on the mortgage loan is usually less than any other loan type.

What are the costs when refinancing your mortgage? 

While mortgage refinance rates might be appealing, refinancing can cost an average of 3% to 6% of the principal balance owed. Other costs to consider are the appraisal cost, title search, application fees or lender fees, and closing costs. Money FCU has a rate lock for 60 days, allowing you the necessary time to gather the additional information and closing costs without losing your rate quote. 

Take a moment to figure out your break-even point. Start with the length of time it will take to pay off the refinancing costs. You can configure the break-even point by dividing your mortgage closing costs by the monthly savings of your new mortgage. For example, $4,500 in closing costs and a $150 savings per month due to refinancing will take you 30 months to break even.

How much equity do you need in your home to be eligible to refinance?

In general, the higher the equity you have in the home, the easier it is to get a loan. Still, most lenders will want to see at least 20% in home equity before refinancing can be an option. The lower your loan-to-value ratio, the more equity you have in your home. You can calculate your loan-to-value ratio by subtracting the mortgage from the value of the property expressed as a percentage value. For example, a home valued at $100,000 minus an $80,000 mortgage balance is an 80% LTV ratio. You have paid off 20% of the loan and have 80% left in the home’s value. An 80% LTV and 20% equity.

Will mortgage rates go down in 2020?

Yahoo Finance predicts that mortgage rates will drop for 2020 based on reports from primary lenders. APRs are anticipated by Fannie Mae to lower for 2020 and 2021. The housing forecast shows a 30-year fixed-rate mortgage in 2019 was 4.4% and is expected to drop to 3.5% in 2020 and 3.4% in 2021. A 5-year adjustable-rate mortgage was 3.9% in 2019 is anticipated to fall to 3.2% in 2020 and 3.0% in 2021, making a prime time for refinancing options. Contact Money FCU today for rates on mortgage refinancing.

Does my credit score prevent me from refinancing a mortgage?

Your credit score will play a large part in the APR (annual percentage rate) that you can get when you apply for refinancing a mortgage. As with any loan, your credit score is viewed by the mortgage lenders as a sign of your creditworthiness. Your creditworthiness determines your interest rate and the chance of loan approval. A higher credit score provides lower rates, and conversely, the lower your credit score, the higher prices you’ll see available to you. Bad credit does not necessarily mean you can’t refinance a mortgage, but it may not be the best time for you to do so. Building your credit could save you a bundle in higher interest rates. But, if your credit score goes up, you can always think about refinancing at that time to get a better price and payment.

Does refinancing hurt your credit?

Your credit score will take a small hit but should recover quickly with continued payments in a timely fashion. According to MyFICO.com, “A new or recent open date typically indicates that it is a new credit obligation and, as a result, can impact the score more than if the terms of the existing loan are simply changed.” Most effects are minimal, but if the loan is written up and considered a new investment rather than changes to the existing mortgage, it will affect your score more.

In general, the benefits of refinancing should outweigh the amount of FICO credit damage. They can be repaired quickly with reasonable monthly payments.

When should you not refinance?

Refinancing is not a good option when you do not plan to stay in the home before the payoff or when you haven’t lived in the house long enough to build at least 20% in home equity. 

Also, it would not be wise to refinance when your credit score is so low that the refinance rate doesn’t make fiscal sense. Refinancing with bad credit could increase your rates and your overall debt. Your debt-to-income ratio must be configured and end in your favor. 

Lastly, it is not the best time to refinance when you can’t afford the closing costs. Adding closing costs to the loan will cost you hundreds, even thousands in interest and lost equity. A better suggestion is to save up for the closing costs before applying for any mortgage loan. 

If refinancing isn’t the right option for you, you can always talk to a financial professional. Money FCU, a local Syracuse federal credit union, offers free financial coaching. This can help you move your money into the best possible accounts for your lifestyle and monetary needs. Their financial coaches can also help with cleaning up your credit or addressing poor credit history. If you’re looking to refinance your mortgage and aren’t sure if your credit is good enough, financial coaches can help.

The short version of it all.

When should you refinance your mortgage? 

When mortgage refinance rates drop.

When mortgage rates fall, and you choose to refinance, you can reduce your monthly payment or shorten your term. This will save on the interest over the length of the loan period. 

When you need equity. 

If you need to pay off debt with the equity from your house and are planning on staying in the home for a significant amount of time, it’s a great time to refinance. Plan on staying in the home for a while to build back up equity in the house. 

When you need a loan, and the interest rate on refinancing your mortgage is better than other loan types. 

Some people like to use the equity in their home to pay for college, make larger home improvements, or use it in place of a personal loan or credit card. Refinancing your home to take cash out can be a great option when it is going to relieve or reduce your debt. Many times the interest rate for refinancing is much lower than a standard personal loan, credit card, or student loan.

Your local credit union can help you decide if refinancing is the right option for you. Talk to a friendly and knowledgeable Money FCU representative now. Call (315) 671-4000 or chat with us Monday-Friday, 9am-4pm.