When Is The Time For Homeowners To Refinance A Mortgage?

Mortgage refinancing means paying a current loan and issuing a new one or replacing it. Homeowners refinance for several reasons –

  • To shorten a mortgage term
  • To acquire a low-interest rate
  • To tap in home equity for financing a large purchase
  • To convert from Fixed-rate mortgage to Adjustable-rate mortgage and vice versa
  • To consolidate their debt

The cost of refinancing can be around 3% to 6% of the loan’s principal amount, so it needs a title search, evaluation and application fees. The homeowner needs to find out if refinancing a mortgage is a smart financial decision.

Homeowners can make use of the mortgage refinance calculator to help them get an idea if mortgage refinancing is the right decision or not. For example, you will need to use factors like Blackhawk bank mortgage rates that exist, the new potential rates and the closing costs. Even the duration you plan to reside in your home is also considered.

Explore some sensible scenarios to refinance an existing mortgage

A decrease in mortgage rates

Mortgage rates possibly fluctuate because it is affected by different factors like inflation, market movements, monetary policy, etc. If mortgage rates decrease, then you get a chance to tap low-interest rate than the interest rate you are paying on your current loan. It is called ‘Rate & Term Financing’. You refinance your mortgage with the low-interest rate but have the same remaining term.

Now, the question arises on how much decrease in interest rate to consider? For example, a 1% reduce may offer considerable savings on a $1 million mortgage. Nevertheless, it is less beneficial for a mortgage worth $100,000. There are costs connected with refinancing, which homeowners need to consider.

Another situation when you feel that the interest rate will fall consistently is to convert your fixed-rate mortgage [if you have] into an adjustable-rate mortgage. If you plan to move in a couple of years, then ARM conversion makes sense. A fixed-rate loan is stable but with ARM, your payments can fluctuate as interest rates change now and then.

Increase in home value

If home value increases then you can apply for ‘Cash-out Refinance’. The new mortgage can be larger than the previous one. The difference you get can be used to pay other higher debts or home renovation. Use money responsibly. Make sure you don’t get trapped in some unsustainable debt, which will need to pay with the remaining mortgage.

Your credit score got better

A credit score plays a huge role in determining the mortgage rate. Simple calculation – higher the credit score means low-interest rate to be paid and vice versa. Use the calculator to find out how much your monthly payments can drop with an improved credit score.

Increase in mortgage rates

If you have an adjustable-rate mortgage then consider refinancing if there is a concern that the interest rates will hike soon. Convert it into a fixed-rate mortgage. Because with ARM your monthly payments can increase beyond what it could with FRM.

Before you decide to refinance mortgage calculate the break-even point along with overall costs like the origination fee, application fee, and appraisal fee. It will even include total interest and for that compare the current interest rate with new rates.