When is the best time to refinance? The short answer is – it depends. Here are 3 of the most common times we see people refinance their mortgage.
Refinance When Interest Rates are Low
The most common reason that people refinance their mortgage is to take advantage of a lower interest rate. It doesn’t take a large change in your rate to see big savings – especially when you stretch out those savings over a few decades.
For example, let’s say your original mortgage was for $350,000 and your interest rate was 4.5%. In that case, your payment each month would be roughly $1,773.
Now let’s say the interest rates have dropped and you can get one for 3.75%. Assuming you still have a $350K mortgage, your monthly payments are now $1,621. So you’re saving $152 a month. Over the span of 30 years, that adds up to over $54,000 in savings!
So even if the lower interest rate doesn’t seem to drop your payment by much, think about the long term. Those small monthly savings really add up.
Refinance Your Mortgage to Get Rid of PMI
Another common reason that people refinance their mortgage is to get rid of private mortgage insurance (PMI.) This is a pesky fee that is common with conventional loans, as many people just don’t have the downpayment to meet the 20% equity required to avoid PMI.
To get an idea of how much PMI can cost, let’s use an example that your mortgage is $400,000 and your PMI is 1%. In that case, your monthly PMI would be about $333 and you’d spend over $36,000 on PMI alone to get to that precious 20% equity mark.
After spending $36,000 on PMI, wouldn’t you want to refinance so you don’t need to keep paying it?
Refinance to Consolidate Your Debt
The third most common time for people to refinance their mortgage is when they need to consolidate their debts. The interest rate on a home mortgage is almost always less expensive than other debts, so it makes sense to refinance and get out some cash to pay off your other debts.
For example, the average student loan interest rate right now is about 6% but many people are bringing up that average, so their loans are more like 7% or 8%. If you can roll that up into a mortgage with an interest rate of around 3.5%, why wouldn’t you? The savings wouldn’t seem high in the short run, but adds up over years and years.
Another example is car loans. The average right now is about 5.27%. While it’s not much higher than that 3.5% interest rate, every little bit counts. Plus it’s nice to only have 1 monthly debt payment instead of the car payment and mortgage payment separately.
When is the best time to refinance? Everyone is different, but these are a few good times to consider the option. For more information on refinancing or buying a home, give us a call at 949-392-6400 and we’ll set something up.