Is Refinancing My Mortgage a Good Idea?
Historically low rates caused demand for mortgage refinancing to jump in comparison to last year. The surge in demand among your neighbors may have you asking, “Is refinancing my mortgage a good idea?” Before you can answer that question, first consider several factors.
The typical rule of thumb is if you can reduce your current interest rate by 1% or more, refinancing could make sense because of the money you can save. Equity can also be built more quickly with a lower interest rate and a shortened loan term.
Falling interest rates present the opportunity to switch from a fixed-rate to an adjustable-rate mortgage (ARM). An ARM offers a low introductory interest rate that “resets” after a predetermined period. Periodic adjustments on an ARM in a falling rate environment should mean lower rates and smaller monthly payments to solve short-term cash flow issues.
However, rising interest rates would present an opportunity to switch from an ARM to a fixed-rate mortgage. If interest rates have gone up when your ARM “resets,” monthly payments can increase and you may be in for a shock. Switching to a fixed-rate mortgage may not lower your current payments, but it could stop your payments from growing.
How much will you pay in closing costs?
If you plan to stay for a longer period of time, refinancing would make sense because you would have ample time to pay off the costs. If you plan to stay in your home for a shorter time, refinancing would not make sense financially.
All applicants are subject to a credit check, debt to income verification and the property value must meet the bank’s loan to value guidelines. NMLS Co. ID #786171. Equal Housing Lender.