Understanding Financial Considerations

Posted on: 21 January 2019

Over time, as you pay down your mortgage, economic circumstances in the country and in your personal finances can change. This means you should take a look at your current mortgage and decide whether it is advantageous to refinance. The following are a few circumstances that may make refinancing a good idea.

Interest rates are lower

There are various factors that determine the interest rate for a 30-year mortgage, but it is easy enough to look at the current rates and realize that they are lower than what you are paying on your mortgage. A lower interest rate can mean lower monthly payments without affecting the number of payments left on your current mortgage. This seems like a no-lose situation, but there are fees associated with refinancing. How low the new interest rate should be compared to what you are currently paying depends upon who you talk to, but a good rule of thumb is a full percentage point.

Your credit rating is higher

If it has been a few years since you first bought your home, your personal finances may have improved greatly. Your credit report may look a lot better than it did in the past. You may have a higher income and less debt. All of this will likely add up to a better FICO score, and this will mean a lower interest rate than you qualified for when you first bought your home.

You want to switch to 15-year financing

When you first bought your home, a 15-year financing may have been attractive because you can pay off your home faster, but unfortunately, the payments were higher than you were comfortable paying. Now, years later, you're making more money and are able to afford a slightly higher payment. Of course, you could simply make a double payment on your current loan and pay it off sooner, but it may be possible to switch to a 15-year loan and cash in on some of your equity to take that special vacation you've always wanted.

You want to switch to a fixed rate

An adjustable rate has advantages when rates are dropping, but if the rates are rising, you will be paying more than with a fixed interest loan. If you believe interest rates in the long run will be going up, then prior to the next adjustment period of your loan, you should consider switching to a fixed rate.

These are just a few reasons to refinance your loan, and they don't even factor in appreciation of your home. It is quite possible that if your house is worth a lot more than it used to be. This adds another factor to refinancing. However, it all starts with getting a few quotations for a fixed-rate in today's market.