Looking to refinance for a lower interest rate on your mortgage? Here’s what you need to know.
When should you refinance?
There are several potential benefits to refinancing your home. But one of the best reasons to refinance is getting a lower interest rate.
As interest rates fall, you may want to refinance your home to reduce your interest payments.
Traditionally, it’s believed that lowering your interest rate by at least 2% will save you a significant amount of money. In some cases, however, lowering your interest rate by a mere 1% can also make sense.
These “rules” are helpful to keep in mind, but they don’t paint the full picture of how refinancing affects your unique situation. While it’s a good idea to look at changing rates in the market, your individual situation can be a deciding factor on whether to refinance.
For example, your original interest rate could be high. So even in a market when rates are rising, you may still be able to get a lower rate on a refinance. It may be a good idea to go ahead and refinance before interest rates rise any higher.
Also, if you have improved your credit score, this could help you get a better rate regardless of changing rates in the market.
What it all boils down to is this:
How much lower of a rate can you get, compared to the rate you already have?
What a lower interest rate means for you
Most people know that a lower rate saves them money on interest, and these savings can seriously stack up over time.
However, a lot of people don’t realize that refinancing for a lower interest rate can also reduce your monthly payments, which means bigger savings in the short term, too.
Lower monthly payments on your mortgage are a total game-changer. The easier it is for you to pay off your mortgage, the more equity you can build in your home.
Keep in mind, refinancing means you will need to pay additional fees and closing costs. When working with a mortgage lender, make sure to go over those costs. You want to determine whether paying these additional costs will end up being worth it for you in the long run.