Interest rates on home mortgages remain historically low, but they are starting to edge up as the economy slowly starts to recover. Many are considering buying a home for the first time or refinancing their current mortgage to try to lock in a lower rate.
Whether or not it’s a good idea to refinance your mortgage will depend on your personal circumstances and your future goals. Here are a few questions you can ask yourself to know if it’s the right time for you to refinance your mortgage:
How much equity have you built up?
If you have only been living in your home a few years or you have refinanced in the past, you may not have enough equity built up to be able to refinance now. You need to have made a good dent in your principal balance in order to refinance the lower amount – otherwise, your new loan might not be much different from your original loan.
What is your interest rate?
Some homeowners were lucky enough to lock in historically low rates of 3 or 3.5 percent in the past few years. It is unlikely that those homeowners are going to be able to get a lower rates.
If you were not one of those lucky few – and you’re paying 5, 6, or 7 percent (or higher!) – then now is a good time to consider refinancing. You may be able to knock off a full point or more from your interest rate.
Has your credit improved?
In many cases, you almost have to have better credit to refinance than you did to get your original loan. In every case, if your credit has not improved, you won’t be seen more favorably by lenders and you won’t be approved for a lower interest rate. Take a hard look at your credit to determine whether you have a good chance of improving your terms.
What are the charges?
Refinancing your loan includes closing costs, just like with your original mortgage. You have to determine if the closing costs are justified by the monthly costs savings of refinancing. A general rule of thumb is that you should break even after only 12 months with your new lowered monthly payment.
Only you can determine what the best choice is for your personal finances. However, these questions can help you come to a decision about whether now is the right time to refinance your mortgage.
Have you refinanced your mortgage? What influenced your decision? Tell us your thoughts in the comments!
Catie Keeler is the primary researcher and writer for mortgagerates.info. Her most recent accomplishments include graduating from the University of North Carolina in Chapel Hill with a degree in business and communications. Her current focus for the site involves mortgage rates graphs.