Refinancing your current mortgage is an excellent strategy to lower your monthly repayments. How does it work? In essence, it replaces your current loan with a new one and reset the clock. In most cases, the new mortgage comes with lower interest, lower interest and a shorter term, or a cash-out option. Considering that most deals these days have low rates, a refi has never been more tempting.
However, everybody in Maryland knows that there’s no template that makes a successful mortgage for all. A refinance in Towson, North Laurel, or Ilchester would only work for you if you analyze the deal, along with your situation. To do that, follow these rules:
Make Sure Interest Rate Drops at Least 2%
The beauty of a refi lies in its interest savings. If the difference between your current rate and the new one is less than 2%, if wouldn’t offer significant value — especially when the loan amount is small.
Unless it’s a no-cost refinance, you would pay certain fees at closing. Whether or not you see yourself changing residences down the road, you have to recoup your out-of-pocket expenses quickly. Your breakeven period should only take a few months. Due to life’s uncertainties, your refinance may even cause you to lose money.
But then again, the 2% lower rate rule doesn’t always apply. If you need a short term to recoup your closing costs — let’s say 13 months — then you can forget about the substantial interest rate difference.
Think of How Long You Intend to Live There
No savvy borrower would refinance and then sell the property before hitting the breakeven period. Make sure you see yourself living in your home for a considerable number of years. Even if you do, it doesn’t mean you should agree for a long breakeven period. Again, life is full of uncertainties. A single event could suddenly change your long-term plans.
If you have to give up your home before your breakeven period is over, you would end up spending more money with the refi.
Don’t Forget about the Term
Other than snagging low-interest rates, shortening your loan’s term may save you precious dollars throughout your mortgage’s life. Of course, a 15-year term would involve less interest than a 30-year term. In addition, you would build equity on your property faster. If you look hard enough, you may lower your monthly repayment despite choosing a shorter term.
These rules make a great guide, but you shouldn’t put your fate on them solely. At the end of the day, doing your research and mull things over before refinancing. If you have to break any of these rules, do it if they don’t make sense for your situation.