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When to Refinance Your Home Loan

The right time to refinance your home loan depends on a number of factors, including your current financial situation, goals and the mortgage rates in your area. You might be looking to lower your monthly payments, lock in a fixed rate or tap equity for an important goal like paying off high-interest debt, making home improvements or covering college costs.

The most common reason to refinance is to lock in a lower interest rate. A lowered interest rate can lower your mortgage payment and save you thousands of dollars over the life of your loan, says Jon Meyer, The Mortgage Reports loan expert and licensed mortgage lender.

A refinanced loan will also help you build equity faster, which can allow you to buy a new home sooner. This is particularly true if your interest rate has fallen or you have accumulated significant equity in your existing home.

Refinancing can also improve your overall loan terms, such as decreasing the amount of mortgage insurance you’ll pay. This can make it easier to afford your house and keep your interest rate low over the long term, according to Tassone.

Depending on your goals, refinancing could also be a good time to consolidate debt into one lower-interest loan. This can help you save money on interest and reduce your total debt load, but it may also make it harder for you to get out of debt if you have a lot of debt or need to move.

Another possible time to refinance is if your income has increased and you want to pay off your mortgage more quickly. Refinancing into a shorter-term loan can help you do this, but it will also mean higher monthly payments since the repayment period is shorter.

If you’re a first-time homebuyer and are concerned about the costs of your mortgage, it might be wise to wait to refinance until you have at least 20% equity in your home. This is because lenders usually require mortgage insurance if you have less than 20% in equity.

Refinancing while you are still paying off your original mortgage can be an expensive mistake, especially if the lender charges a prepayment penalty for early mortgage payoff. This penalty can cost you a lot of money, especially if your new loan isn’t as competitive or has a longer term.

The key to refinancing is to be able to break even on the costs, says Michael Cosset, chief executive of the Mortgage Bankers Association and president of the National Refinance Alliance. This is done by calculating your savings on the refinance as well as your closing costs.

It’s also smart to calculate how long you plan to live in your home. Refinancing too close to selling your home or having children might not be worth the costs, especially if you’re planning to move in the near future, notes Cosset.

Cash-out refinances can be a great way to tap your home’s equity, but they aren’t always the best idea. They’re a better option for paying for major repairs or home renovations, but they can be a waste of money if you plan to splurge on big-ticket items like a car or a vacation.

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