Recent homebuyers may find ‘significant’ savings by refinancing now

If you purchased a home within the past two years, refinancing and getting a new mortgage might be the last thing on your mind.

Chances are, you’ve yet to recoup your down payment and closing costs. And if you get advice from others, some might say that it’s too soon to refinance since you’ve only recently received the original mortgage.

But while some people might keep an original mortgage for several years before refinancing, a recent drop in mortgage interest rates could create ‘significant’ savings for you if you refinance now.

Here’s what you need to know about refinancing, as well as tips to decide whether now’s the right time for you.

What is the Purpose of a Refinance?

Refinancing a mortgage is an excellent way to take advantage of lower interest rates and acquire a new mortgage with different terms that better fit your current needs and circumstances.

When you receive an original mortgage, you agree to pay a certain amount at a certain rate for a certain period of time And unfortunately, if you want to adjust these terms, you usually have to refinance the loan.

Refinance is the process of getting a new mortgage to replace an existing one. Homeowners refinance for different reasons, but getting a lower rate is often a huge motivating factor.

The downside to refinancing is that it usually resets the mortgage clock, extending how long it takes to pay off the loan. This also extends the number of years you pay interest on the loan. But for homeowners looking to save money, the monthly savings with refinancing often outweighs the extra years of payments.

Why Refinance Now?

Even if you’ve only had your home loan for two or three years, don’t shake off the idea of refinancing your mortgage.

According to mortgage experts, home loan rates have decreased about 1.25% from their 2018 peak. This is good news for people purchasing homes and for current homeowners looking to save money.

Let’s say you’re refinancing a $250,000 mortgage. An interest rate decrease of 1.25% could translate into an annual savings of over $2,000. What can you do with the savings?

Since refinancing can free up cash in your budget, you can use the money to plan home repairs or renovations. Or, put the money into your savings account and build your emergency fund. Some homeowners even use the savings from refinancing to save for retirement, a child’s education, etc.

Is Refinancing Right for You?

The truth is, mortgage interest rates aren’t likely to stay low forever. So, if you want to take advantage of a low rate and lower your monthly payment, now might be the time to act.

But there are a few things to consider first.

Remember, refinancing will involve closing costs. So, consider how long you’ll live in your home. For refinancing to make sense, you’ll want to keep the home long enough to recoup your refinancing costs.

Also, consider your financial situation and whether you can qualify for a refinance. You’ll have to fill out a new mortgage application, have your credit checked, and provide income and employment verification. Although rates are low, you’ll only qualify for the lowest rate if you have a great credit score.

You can also read our blog on "How Does Your Credit Score Affect Your Mortgage Rate"

Some people might hesitate to refinance because they don’t want to extend the timeline for paying off their house. Understand, however, that there’s no rule that says you have to refinance for another 30 years. You can choose from a variety of home loan terms, which can include 10, 15, or even 20 years.

A shorter term, however, might be more feasible for those who are closer to paying off their home loan. If you’ve only had your mortgage for a few years and are concerned about extending your payoff timeline, one option is to refinance for another 30 year term and then make extra principal payments throughout the year to play catch-up.

Final Word

To learn more about refinancing, contact the loan experts at Blue Spot Home Loans. Mortgage interest rates can increase at any time, so now’s the time to act. Getting a lower rate is an excellent way to save money and keep your mortgage payment affordable.