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Empower Wealth Blog post by Empower Wealth

When Is the Best Time to Refinance Your Loan?

You’ve bought or invested in a home and are making regular mortgage payments. What happens when you want to adjust your repayment plan? Perhaps a step up in your salary has given you additional resources to pay off your balance in less time. Maybe an outside hardship requires you to refinance in order to improve your cash reserves or your loan might be a few years old and you are thinking what other better deals out there. Whatever the reason may be, changing your lender or the terms of your loan should be an informed decision. Considerations such as how long you intend to stay at the property, what you hope to achieve from refinancing and knowing the long-term impacts of changing your lending terms and mortgage are all factors that should be considered in order to determine the best time to restructure.

Perhaps the most important step in deciding a time frame for refinancing home loan payments is what you hope to achieve through restructuring. It is advisable to revisit your mortgage plans at least every five years. Just refinancing a mortgage will not pay off debt, but it could restructure your remaining balance, often at a lower rate and with different terms meaning an overall cheaper loan product.

Are you hoping to reduce expense caused by interests? Do you want a lower monthly payment? Are you hoping to combine a home equity loan with your mortgage into a fixed-rate plan? Do want to release some equity on your loan to be able to prepare for your next property purchase? Having a clear goal will help you establish a strategic plan of action.


A. Commit to that Five-Year Review

Making a habit of reexamining your loans helps you decide when is the best time to refinance your loan. Refinancing every one or two years will probably cost you more in fees and charges than it will actually save you money, however committing to a thorough review of your home loan terms every five years should make significant difference. The finance industry is ever changing and interest rates can change in a matter of months so if you are not aware of these changes, you might be missing out on opportunities!

The question is, how do you start doing a complete review? You can personally review statements and payment terms but do you know what’s the current market rate or the various loan packages that are available? The best way to do a full review of your financial health is to call on a professional service such as a mortgage broker to assist you and include an appraisal of your property. A licensed mortgage broker have access to various loan packages offered by multiple lenders and because it is part of their full-time job, they are also very familiar with the rates changes. Hence, they would be able to evaluate if your loan is maintaining its competitiveness or if it’s time to re-negotiate or shift lenders.


B. Pay Attention to Market Changes

Knowing characteristics of current interest rates and having a grasp of where future rates are headed will help you decide when it is most advantageous to refinance mortgage payments. If you purchased your home during a time when rates were high, you may have opted for a variable-rate plan with the hopes that fluctuations in the market would decrease over time. If interest were low when you chose your mortgage, you likely settled on a fixed-rate plan to take advantage of a locked-in repayment rate.

If you are refinancing in order to switch from a fixed to variable rate, or vice versa, be certain that you are aware of current trends to ensure that you will benefit from refinancing your home loan. Rates vary daily and are affected by both national and international economic factors. Even in a low-interest climate homeowners or property investors need to evaluate their mortgages as part of a bigger picture; in addition to changes in the market the balance of the mortgage, how long you intend to stay in your home and how you plan to adjust the timeframe of repaying your debt all play into deciding when to take advantage of drops in the market. Larger mortgages will be more impacted by lower rates because of the additional expense incurred by interest. Be sure to account for all terms and fees that the refinancing might include in order to determine whether or not to take advantage of significant changes in the market. Again, mortgage brokers can help you with that on top of track trends to identify how to refinance home loan payments and take advantage of changes in the market. However, always remember that interest rate is not king as there are also other considerations such as flexibility, credit cards, banking services and other professional package options.

[Recommended reading: Different Types of Property Loans and Why Interest Rate Is NOT King]


C. Use Expiration Dates to Your Benefit

If you have previously opted for a fixed loan, then the expiry date of the loan is definitely the time for a review. For example, if you’ve locked into a fixed rate for three years, at the end of that period you can choose to renew with a similar plan or change to a dynamic rate that reflects the current market. There are different types of loans and many adjustable rate mortgage plans also feature a portion that is fixed while the rest remain as variable loan. This is what called a Split Loan.

If the fixed portion of your loan is expiring within the next couple of months it is wise to begin browsing the marked to discover what options you have to refinance mortgage terms. Needless to say, in a decreasing rate environment, perhaps its best to opt for variable rates while if the rates continue to rise, many people begin to feel the pressure of increasing payments and need to take the opportunity to evaluate their options. If you already have low variable percentage rates, opting for a fixed plan will provide the security of a constant rate that will not change in the future. When expiration dates near, shopping around for more competitive options can save money and provide certainty for future payments.


D. Reinvesting in Current or New Property

Another circumstances that leads many property owners to seek new payment terms is the desire to invest in new property or to start renovations on their existing property. Though this may extend the length of the loan, a good broker will help you keep your investments safe and devise the most advantageous plan. Borrowing money against your home or extending the length of your loan may increase costs down the road, but weighing out the benefits of investing in new property or making improvements to your existing property will help you decide whether this is the right move for you. All this comes to strategic loan structuring and if you have set up your loan correctly from the start, refinancing the loan for this purpose shouldn’t be a hassle.


E. Personal Factors for Consideration

Deciding the right time to seek assistance for restructuring your payment plans demands an assessment of personal situation as well. How stable is your job? Do you have a spouse that provides a second income? Would it be wise to switch interest only for a short period of time to help with cash flows? Being able to predict the stability or change of your family’s financial future will help you determine the best time for adjusting monthly payments. Perhaps you’ve been relying on two incomes to meet billing expectations for the past ten or fifteen years; if you or your significant other plan on retiring, a sudden reduction in monthly income may require you to seek lower monthly amounts due. A child whose education requires additional financing or a home that needs renovations are additional reasons to consider a reevaluation of your current situation. These are all huge financial responsibilities that can be assisted with funds from a refinanced home mortgage.


When You Should Wait to Refinance Mortgage Plans

While there are plenty of solid reasons to seek a restructuring of your payment plan, there are just as many reasons to hold off and wait for a better time. Many borrowers are guilty of chasing lower rates, which often proves to be a mistake. Jumping around between lenders doesn’t allow for good relationships to be built and can lead to poor serviced and missed opportunities in the future. If you have a good relationship with your lender, consider what you stand to lose by jumping into an unknown partnership. Another important consideration is how long you have been in your current loans. If you only have a few more years left on your mortgage, lowering your monthly payment may not be worth the increase in loan-term. Working with a professional and experienced mortgage broker can help you decide whether it is the right time to refinance or switch lender if you are towards the end of your loan-term.

Life circumstances change, as do future goals, monthly expenses, and personal income. Where you were financially when you purchased your property may be entirely different than your current position. Take inventory of major purchases that you’ve made, investments that you are planning and any significant changes in your expenses. Interest rates, offset accounts, unlimited payments, repayment holidays and other personal loans are just a few factors to consider when determining the right time to adjust your loan terms. Set a firm goal for refinancing and weigh out the pros and cons in order to select the best time to adjust your mortgage loan. All these will help as well as staying educated on market trends will allow you to better judge when it is most appropriate to refinance.

Whether you made mistakes when you bought your first home or you are strategically working to expand your property portfolio, there are many reasons why you might need to seek help in how to refinance home loan payment plans. If you don’t have a good relationship with your current lender, sourcing for a mortgage broker that you can trust can have a significant impact on your financial future, as they can shop around all different lenders and do the hard work for you.

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