When is the best time to refinance your mortgage?

When interest rates get as low as they are now, it’s natural to start questioning whether you should refinance your home loan. There are four main reasons to refinance, but there are also other factors to consider if any of them apply.

Lower interest rates

The number one reason to refinance is if interest rates are lower now than they were when you signed for your fixed-rate mortgage. According to Nerd Wallet, the average rate on a 30-year fixed-rate mortgage is 2.883% as of January 2021, while the average rate on a 15-year mortgage is 2.295%. If your interest rate is higher than either of those two numbers, you can probably save money by refinancing with a lower rate.

One important thing to note is that you never want to extend the term of your mortgage unless you are having serious issues making your monthly payments. Thus, if you did have a 30-year mortgage and have 25 years left, it would be better to try to get a 20-year loan instead of a new 30-year term.

Additionally, don’t forget about closing costs. If you just refinanced a year or two ago, you may not have paid off the closing costs from that loan yet. If you refinance again, you’re merely adding onto your debt instead of paying it off. It might be unwise to refinance again in such a scenario.

Other reasons to refinance

There are also other reasons to refinance. Some homeowners choose to refinance their mortgage to shorten their loan term, but it isn’t always necessary to do this. You could pay more on your monthly payments to get it paid off faster without having to pay for closing costs to make everything official.

You may also want to refinance to convert your loan from an adjustable-rate mortgage to one with a fixed rate or vice versa. Deciding whether to refinance for this reason depends mostly on how long you want to stay in the house. It may not be advisable to keep an ARM for 20 or 30 years because interest rates are sure to rise beyond the rate you could have locked in with a fixed-rate mortgage.

Finally, some homeowners refinance to unlock some of the equity in their home or consolidate loans. This idea can seem like a good one on paper, but you should make sure you won’t have even more debt problems afterward.

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