You may imagine that your mortgage is a forever-binding contract. Buying a home is a major commitment – but it’s normal to regularly reevaluate your mortgage. If the mortgage you signed up for no longer fits your situation, you can refinance your loan and adjust your terms. But when exactly should you reevaluate your mortgage loan?
Today, we’ll take a closer look at a few situations that might make you want to change things up.
Mortgage Interest Rates Drop Significantly
One of the best times to reevaluate your mortgage is when interest rates on home loans significantly drop. Your interest rate plays a large role in the amount of money that you end up paying for your home. If you locked into a loan during a time when rates were high, you might be overpaying for your mortgage. You can save money by refinancing to a loan with a lower rate.
Just a few percentage points’ difference can mean a huge amount of money saved by the time you own your home. Let’s look at an example. Imagine that you have a mortgage with $150,000 left on your principal balance. You have a fixed rate of 4.5% and 15 years left on your term. Now, imagine you see that mortgage rates are lower now than what you’re paying. A lender offers to refinance your loan with the exact same terms to a 4% interest rate.
If you keep your current loan, you’ll end up paying $56,548.21 in interest by the time you finish paying off your loan. If you take the refinance, you pay $49,715.71 in interest before you own your home. Just half a percentage point difference saves you over $6,000.
How can you tell if current interest rates are lower than what you pay now? First, take a look at your current rate. You can typically find it on your mortgage statement or your initial loan documentation if you have a fixed-rate loan. If you have an ARM, you might need to contact your lender for information on your current rate. Then compare what you pay now to the average market rate for your loan type.
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Your Credit Score Increases
Waiting for interest rates to drop isn’t the only way you can qualify for a lower rate. You may also qualify if your credit score is now higher than it was when you applied for a loan.
Why do mortgage lenders care about your credit score? Your credit score is a numerical representation of how well you manage debt. If your score is high, it’s probably because you always make your loan payments on schedule and you don’t borrow too much money. On the other hand, if your score is low, it might be because you have trouble managing debt.
A mortgage is a form of debt. Lenders look at your credit score before they offer you an interest rate because they need to know how reliable you are as a borrower. If you have a higher score, you’re statistically less likely to miss a payment or fall into foreclosure. This means that your lender takes less of a risk when they loan you money and can give you a lower interest rate. If your score is low, it means there’s a higher chance that you might not pay back what you borrow. Your lender needs to manage the risk they accept by giving you a higher interest rate on your loan.
The good news is that making your mortgage payments on time each month increases your credit score. If you haven’t checked up on your score in a while, you might be in for a pleasant surprise. Take a look at your numbers and compare them to your score when you got your loan. If they’re much higher than they were when you applied, you might want to seek a refinance.
Your Lender Contacts You
As you continue making payments on your loan and building equity, you may not realize that you’re building a stronger profile as a borrower.
Occasionally, your lender might contact you with a new offer for a refinance. If your lender sees that you qualify for a lower rate or you’re overpaying on your loan each month, they may reach out and offer a solution. Consider the terms of both your current loan and your lender’s new loan before you apply for a refinance.
You Plan On Selling
If you’re planning on selling your home, you should take a look at the terms of your mortgage loan. Specifically, you’ll want to check for a prepayment penalty clause written into your mortgage terms.
A prepayment penalty is a fee that your lender charges you if you pay off your mortgage too early. Prepayment penalties are usually set at a certain percentage of your unpaid principal balance. This can present problems if you want to sell your home after you’ve lived in it for only a few years.
Lenders only make money if you hold onto your mortgage loan and make interest payments for a long period of time. If you sell your home or refinance too soon after you get your loan, your lender will make less money than they were anticipating. Prepayment penalties discourage you from paying ahead on your loan or selling too quickly. This ensures that the lender recoups the money they expected from your loan.
It's important to note that not every loan has a prepayment penalty written into it. For example, if you have a loan with Rocket Mortgage®, you can rest assured that you won’t need to worry about prepayment penalties. Some states have laws in place that prevent mortgage lenders from writing prepayment penalties into their loan terms. Be sure to fully read your mortgage paperwork before you let a prepayment penalty interrupt your plans.
If you do find a prepayment penalty clause in your loan, don’t sell until you do the math and understand how much money you’ll lose. Many prepayment penalties expire after a set number of years. For example, your prepayment penalty clause might state that you’re only liable if you sell your home within 5 years after getting the loan. If your penalty does have an expiration date, you might want to wait to sell until it passes.
You Are Having Financial Difficulty
If you’re having trouble making your loan payments, you might want to consider a refinance. Refinancing might cost you a bit of money in closing costs now, but it can significantly lower your monthly payment.
The best way to lower your monthly payment is by refinancing to a longer term. When you take a longer term, you give yourself more time to pay off your mortgage. This means that the amount that you pay each month is lower.
Let’s consider an example. Imagine you have a loan with a 15-year term, a 4% interest rate and $150,000 left on your principal balance. Your monthly payment in this scenario is about $1,109 before taxes and insurance. Now, imagine that you run into an unexpected expense and can no longer comfortably afford this payment. If you refinance your balance into a 30-year loan, your monthly payment falls to about $716. That’s about $400 less than you were paying before. Refinancing to a longer term can help you avoid foreclosure by allowing you to keep paying on your loan without moving out.
One important thing to keep in mind is that refinancing to a longer term makes your loan more expensive as a whole. Paying less each month may be more convenient but it also means that you pay interest for more years. You should only refinance to a longer term if you’re sure that you cannot continue making your monthly payments as your loan stands.
You might also be able to lower your monthly payment by refinancing to remove mortgage insurance. If you have an FHA loan, you must pay a monthly mortgage insurance premium throughout the life of your loan. Unlike private mortgage insurance you must pay on a conventional loan, you cannot remove FHA insurance if you had less than 10% down when you took out the loan. However, you can refinance your FHA loan into a conventional loan. If you have at least 20% equity in your property, you won’t need to pay for PMI. Many people who take an FHA loan refinance as soon as they reach 20% equity to save on insurance.
You Are Not Satisfied With Your Current Lender
Your mortgage lender should be an asset through the home buying and mortgage repayment process. If your current lender isn’t meeting your needs or responding to your inquiries in a timely manner, you might want to refinance with a new lender.
Look for a lender that’s recommended by family and friends and that has a high rating for client satisfaction. You may also want to search for a lender that offers more convenient features, like a comprehensive mobile app or customer service that extends beyond business hours.
There are plenty of times when you might want to reevaluate your mortgage loan. If market interest rates have gone down or your credit score is higher now than when you got your loan, you can save money with a refinance. If you’re planning on selling your home, you’ll want to reevaluate your loan for a prepayment penalty. If you’re having trouble making your payments, refinancing to a longer term or new loan type might be the solution. Finally, if your current lender’s customer service is subpar, you might want to refinance with a new lender.
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