If you took an interest-only loan to keep your loan payments more affordable, you may be considering refinancing it.
How do you know when it’s right to do so? Typically, today you can’t get an interest-only loan any longer. This means that when you refinance, you’ll have to pay principal and interest on your loan. Should you give up your interest-only loan for a standard principal and interest payment loan? If so, when is it right to do so? You’ll need to ask yourself the following questions.
What are Your Plans?
Do you see yourself staying in the home for the long-term or will you move soon? If you don’t think you’ll be in the home for at least a few years, you may not benefit from refinancing. When you refinance it costs you money, as you have to pay the closing costs. You also restart the loan term over again, which means it could take longer to own your home free and clear.
If you will stay in the home for the long-term, though, you may want to refinance out of your interest-only loan. Typically, these loans are structured as ARMS or adjustable rate mortgages. This means that you pay a fixed interest rate for a certain number of years. After that, the rate can adjust on an annual basis. Without being able to predict what interest rate you will pay, you could find yourself with a hefty mortgage payment. If you’ll be in the home for the long-term, refinancing to get the lowest interest rate can help you save money and pay your loan off faster.
What are Interest Rates?
Just because you can get a lower interest rate, it doesn’t mean that you must refinance. You should figure out your break-even point. This is the point that you pay off your closing costs and realize the savings on your loan.
If you end up paying a large amount of closing costs but only save a little money each month on your mortgage payment, it may not be worth refinancing. Rather than focusing on the interest rate, figure out what your monthly payment would be. Next, figure out the total amount of closing costs. Finally, use the following equation to determine your savings:
Total closing costs/Monthly Savings = Months to make up the closing costs
Your break-even point is the number of months it takes to make up the closing costs. This is a good guide to help you decide if it makes sense to refinance. In other words, it’s not worth the cost if you won’t reap the savings.
What are Your Qualifications?
Finally, you need to make sure that you qualify for the best rates right now. If you don’t have good credit and a low debt ratio, you could find yourself with a higher interest rate than you anticipated. It may not make sense to spend the money refinancing if you can’t get the low-interest rates.
Before you refinance, it’s a good idea to maximize your credit score by making sure you pay your bills on time, pay down your outstanding credit balances, and avoid making any new inquiries in the months leading up to your application.
Refinancingyourinterest-only loan only makes sense when you will save money. Take your time and shop around for the lender that will give you the lowest interest rate and the best closing costs.