When is the Best Time to Refinance?
While it’s great to keep up with your car or home loan payments, you shouldn’t leave repayment on automatic. Instead, it’s best to keep an eye out for the opportunity to refinance your loan, allowing you a lower interest rate and a potentially lower payment. Before researching your options for refinancing, it’s good to study up on knowing the best time to refinance.
The Best Time to Refinance is When Rates are Lower
Keep a close eye on mortgage and interest rates. When you’ve seen they’ve gone down, it’s a good time to jump on an opportunity to refinance your home or car loan. This type of mortgage refinancing is known as rate-and-term financing. What that means is that while your new loan will have a lower interest rate than your current loan, the overall term will remain the same. Even if rates have fallen just one percent less than what you’re paying now, that can still add up.
With lowering interest rates, you can sit down with a financial planner to see if she or he anticipates interest rates falling in the near future. If so, you may want to consider refinancing from a fixed-rate mortgage to an adjustable-rate mortgage. This makes a lot of sense if you see yourself moving in the next few years, as you’ll end up paying more in interest if rates rise again in the future after they fall. That said, the initial rate of an ARM remains fixed for a specific period of time, such as one month or five years.
Also, the Best Time to Refinance is When Your Property Has Increased in Value
Touching back on mortgages, another great time to consider getting a free credit report is when your home’s value has gone up. Say that you originally put down a $40,000 down payment on your first home and took out a $260,000 loan to pay for your home when it was valued at $300,000. Now, you only owe $100,000 on your mortgage.
Over the years, the value of your home has gone up to $350,000. If you want, you can refinance for more than the $100,000 you still owe. Say that you opt for a cash-out refinance for $120,000 rather than $100,000. You can use that $20,000 difference to make improvements or upgrades to your home to increase its value even more. Either that, or you can use the difference to pay down your other high-interest debts.
One vital point to keep in mind with this type of refinancing is that it works best when you use the money on solid investments, not on something frivolous like a vacation or a new car, essentially a purchase that doesn’t pay you back.
No matter how you choose to use your cash-out refinance funds, do yourself a favor and carefully read over the new terms and interest rate for your new loan. You’ll also have to pay closing costs when you refinance, so check to make sure it’s actually worth it.
You Also Should Refinance When You Want To Consolidate Your Debt
If refinancing your car or home loan means you can lump your debts together and have one less monthly payment to worry about, it could be a great move. In the above example, for instance, using the difference from a cash-out refinance could allow you to pay off a couple of your debts so you only have to focus your attention and money on the remainder of the refinance loan. When you consolidate your debt, you don’t have to worry about keeping track of several different payment dates, payment amounts, or interest rates.
But You Want to Make Sure That You Refinance When You’ve Got a Better Credit Score
Maybe you had decent credit when you originally applied for your loan, but you’ve been working hard to boost your score and your credit health. Now is an ideal time to think about refinancing your loan. When you have a better credit score, you qualify for equally better interest rates. Even if you manage to net a lower interest rate and a lower payment, it’s still a good idea to pretend as if neither your interest rate nor your monthly payment has changed. That way, you make the same monthly payment, but you can devote more to the principal, allowing you to pay off your new loan faster.
Overall, Refinance When You Have a Better Relationship With Money
One of the biggest pitfalls of freeing up finances or credit after refinancing is that you may fall back into financially unhealthy habits. There’s no use of you paying off a credit card with a cash-out refinance if you’re only going to rack up more credit card debt in the future. Be honest with yourself regarding your current relationship with money. If there’s even a chance you may use your money or credit responsibly, don’t refinance. This is said mainly because you have to pay to refinance.
There’s just as much to gain as there is to lose when it comes to refinancing. Get a solid idea of what the road ahead looks like as you’re mapping out your course to financial freedom and peace of mind. The best time to refinance will always be when your home is worth more, your credit is at its best, and finance rates are low.