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When should you refinance a mortgage?

Thanks to refinancing, not only new borrowers, but also individuals who have previously taken out mortgages can benefit from the current reduction in mortgage rates.

Refinancing a loan is actually the execution of a new mortgage loan. It is always sensible to use this tool, when the future savings from a lower interest rate exceeds the cost of refinancing. Refinancing can cost between 3% and 6% of a loan’s principal as it requires an appraisal, title search, and application fees. Typically, this condition is met when the difference between the refinance rate and the current mortgage rate is about 1-2 percentage points.

You may also shorten the term of your mortgage because when the interest rate drops, you can refinance your debt and shorten its term at the same time, without a significantly change of your monthly payment.

There is also an option to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.

It is known that ARMs initially offer lower rates than fixed-rate mortgages, but often periodic adjustments over the years can lead to a situation where the rate is higher than what is available with a fixed-rate mortgage. If that happens to your loan, do not delay to refinance it and stop worrying about future interest rate hikes.

If, on the other hand, you have a fixed-rate mortgage it makes sense to consider switching to an ARM, which often has a lower monthly payment than a fixed-rate mortgage in case interest rates fall, especially for those who do not plan on staying in their home for more than a few years. Because you can lower your interest rate and monthly payment in the short term, you do not have to worry about how rates may rise in 30 years.

Moreover, if rates are forecasted to drop further, periodic rate adjustments on the ARM will lower rates and reduce monthly mortgage payments, eliminating the need to refinance each time rates fall.

Refinancing is also a good option when you want to combine several loans from different banks into one for ease of payment, or when your family’s expenses have increased and you want to reduce your monthly payment and avoid restructuring.

As an option, refinancing still helps to tap equity and gives you the ability to use your equity to cover large expenses, such as the cost of renovating your house or kid’s college education. It is certainly fair to agree that renovating increases the value of a house, or that the interest rate on a mortgage loan is less than the rate on money borrowed from another source. But it is worth remembering that sooner or later you will have to pay the bills.

Current mortgage rates are among the lowest in the history of the U.S. mortgage market. This makes it the best time to take out a new mortgage as well as refinance an old one. Contact our experts in any way that is convenient for you, and we will quickly advise you according to your objectives!

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