Posted: December 10, 2024
Unlocking Savings: Is it worth refinancing a home loan?
With mortgage interest rates budging only slightly from recent highs in 2023, many homeowners are faced with a decision: Act now to take advantage of the downward increment or hope for additional drops in the upcoming months. Consider some of the following factors to help you calculate whether a refinance is the best move when interest rates are bumpy.
4 Advantages of Refinancing a Home Loan
- Lower monthly payments are one of the main reasons that homeowners choose to refinance. A reduced interest rate can lead to decreased monthly payments, easing your financial burden. Additionally, a lower interest rate can lead to substantial savings over the life of a loan, potentially putting you thousands of dollars ahead.
- Refinancing during a period of declining rates may also shorten your loan term. For instance, you could refinance from a 30-year to a 15-year mortgage without significantly increasing your monthly payments, allowing you to pay off your mortgage faster.
- If you have significant home equity, a cash-out refinance might be an option. This allows you to access funds for home improvements, debt consolidation, or other financial needs, often at a lower interest rate.
- Refinancing can also enable you to switch loan types, for example from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, providing more predictable payments and greater financial stability.
4 Factors to Watch Out For
Before deciding to refinance, it is important to consider the following factors.
- Closing costs, which typically can range from 2-5% of the loan amount, should be weighed against the savings from a lower rate to ensure the savings outweigh these costs.
- Calculating the break-even point—how long it will take for the savings to cover the refinancing costs—is essential. If you plan to move or sell your home before reaching this point, refinancing might not be advantageous.
- Your credit score also plays a role in refinancing. A higher credit score can help you qualify for better rates, so check your credit score and work on improving it if needed before applying.
- Finally, carefully review the terms of the new loan, including any prepayment penalties or changes to the loan duration, to ensure they align with your financial goals. Consider broader economic conditions—in this case, the possibility that interest rates will continue their downward movement—and your personal long-term financial outlook. Even if rates are lower now, ensure that refinancing fits into your overall financial strategy.
By weighing these factors, you’re in a better position to make an informed decision about whether refinancing your mortgage is the right move when interest rates fall. For more information on what a refinance might look like for you, contact our Residential Mortgage Loan Officer Peter Salamone.
