Knowing when to refinance is a little like baking – it’s part art and part science. You need to have the perfect blend of ingredients to get a well-structured and satisfying finished product.
So put your apron on and let’s get to it!
A well-baked refinance begins by understanding what your objective is. In most cases, you’re looking to do one of these things:
The most important thing to keep in mind, however, is what you want to accomplish. It’ll affect every decision you make.
Your equity consists of one part the property’s current market value minus one part the amount owed on your mortgage.
Higher equity in your home puts you in a better position for a cash-out refinance – where you’ll get a new loan with a larger principal and pocket the difference in cash to use for major expenses.
Depending on your recipe, the pounds of equity used can vary.
Like a purchase loan, you will have to pay for closing costs when you refinance. If you’ve timed your refinance right, you’ll recoup what you’ve paid in closing costs in potential savings each month. That’s called the “break-even” point.
A refinance could make more sense when you plan to stay in your home past this point, or you’ll risk losing money on the refi.
With a refi, you have the option to use an entirely different loan with a new term. Sometimes the term is shorter, sometimes it’s longer.
And even if you refinance to a lower rate, extending your loan term may mean that you’re spending more over the life of your loan.
Your credit score can have a direct impact on the rate you get for your refinanced loan. Usually, lenders will offer borrowers a better rate if they have better credit because of the lower risk.
Think you have all of these ingredients at the ready? Then give this comparison guide a download: