Formula for Refinancing: How to Know the Timing is Right to Refinance Your Home

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Thanks to current mortgage rates, refinancing your home could be a great way to lower your interest rate or improve your loan terms – or both! But a low rate isn’t the only number to consider when trying to decide if the time is right for a refi.

In fact, while there are good reasons to refinance, there are also good reasons NOT to refinance. Let’s take a look at both, along with some important questions to ask yourself before taking the leap.

 Good Reasons to Refinance Your Home

There are some serious benefits to taking advantage of a mortgage refinance:

  • Get a better interest rate. The amount of interest you pay can mean the difference of thousands of dollars over the length of your loan. Conventional wisdom suggests that it’s a good time to refinance if you can shave at least ½ (0.5) percentage point off your interest rate. But make sure you check out all the considerations below since there are some scenarios where an even smaller reduction may be worthwhile.
  •  Adjust the term (longer or shorter). There are good reasons to tinker with the length of your mortgage – both longer and shorter. If you’re nearing retirement, you may choose to pay off your mortgage at a faster rate. State Bank of Cross Plains (SBCP) offers both 15-year and 10-year fixed rate mortgages. On the contrary, you may be going through a period when a lower monthly payment might fit your needs better, such as freeing up money to pay for college. Spreading your mortgage out over a longer term, like SBCP’s 30-year mortgage, gives you extra money for your monthly budget. Just remember, lengthening the term of your loan means more years of paying interest (and likely means you pay more for your home overall).
  •  Convert from an ARM to a fixed rate. You may have initially chosen an adjustable rate mortgage to get a lower interest rate, but eventually you’ll want or need to switch to a more predictable fixed rate.
  •  Get rid of PMI. Most lenders require private mortgage insurance on loans with less than 20 percent equity. Some lenders will automatically remove PMI payments once you surpass 20 percent equity, but some don’t. If you have reached that magic 20 percent, a refinance will remove the extra PMI fees.
  •  Cash out. If you need a lump sum for a large purchase like starting a small business or adding on to your home, it’s possible to get a cash back mortgage by taking advantage of the equity built up in your home thanks to rising home values. However, make sure you have a plan to repay this type of loan or perhaps consider a Home Equity Loan or Home Equity Line of Credit instead. Talk to one of our loan specialists at (608) 497-4640 or visit your local State Bank of Cross Plains for more information.

Reasons NOT to Refinance

There are also good reasons to automatically skip the refinance:

  1. You have less-than-ideal (or downright bad) credit. Published mortgage rates are based on good credit scores. You won’t get those great rates with bad credit scores.
  2.  You have too much debt. Some people use a mortgage refinance to consolidate debt, but we recommend you reconsider. You won’t lose your home if you miss a few credit card payments. You might lose your home if you can’t keep up with your mortgage payments. The risk is just too great.
  3.  A move is in your near future. Most mortgage refi’s come with closing costs. You should figure out the break-even point for staying in your home to make up those costs before actually reaping the benefits of the lower rate.

Additional Considerations

Once you’ve determined that your reasons for refinancing your mortgage are solid, here are some of the things to consider before taking the plunge. Use this information to determine your financial break-even point and the best place to get your mortgage refi (SBCP, of course!):

  • What is my credit score? Good credit = better mortgage rates.
  • What are the closing costs? Divide this number by the amount you save per month to determine how long it will be before you start saving money from the refi.
  • Should I pay for “points”? Paying for points is a way to pay 1 percent of your loan in cash to reduce your interest rate long-term. In most cases, it’s worth it to pay a few points if you can afford the upfront cost.
  • How much equity is in my home? You usually get the most out of a refinance if you have at least 20 percent equity.
  • How much can I save? Use our mortgage refinance calculator to figure out how much a potential refinance is worth to you. If you’re changing the length of the loan, be sure to evaluate the numbers based on paying the loan back in the same number of years for an apples-to-apples comparison.
  • Is the mortgage serviced locally? All mortgages from State Bank of Cross Plains (except VA, FHA, and USDA loan products*) are serviced locally. Why should you care? It’s part of our mission to help our local communities thrive and our neighbors succeed. We put our trust in you so you can put your trust in us. And you get to talk to someone face-to-face if you have questions or problems with your mortgage. Local management matters.

Getting Help

Want help running the numbers? Visit our mortgage refinance calculator to find your break-even point. Or make an appointment with one of our mortgage loan specialists by calling (608) 497-4640 or your local SBCP office.

* *VA, FHA, USDA Loan products are not serviced by the State Bank of Cross Plains

Member FDIC and Equal Housing Lender.

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