Mortgage Minute: When Does It Make Sense to Refinance

3 minutes

If you’re like many American homeowners, you’ve thought about refinancing at some point — either when interest rates have dipped, or when you’ve wanted to access the equity in your home for other things, like debt consolidation or renovations. You’ve also probably asked yourself when does it make sense to refinance?

Reasons to Refinance

In order to determine if it makes financial sense to refinance your home, it’s important to delve into the reasons you’re considering refinancing. Determining your goals ahead of time will help you to decide if a refinance is ultimately worth it for you.

The ‘why’ is more important than the ‘what’ here, meaning that you might be looking for a lower interest rate and monthly payment but the real reasons are to improve your monthly cashflow, save for retirement or your children’s education, or pay your home off sooner and with less interest.

Top 5 Reasons Homeowners Refinance Their Mortgages

  1. Lowering the interest rate and the monthly payment
  2. Taking cash out of the home’s equity
  3. Changing the loan term, either shorter to pay the home off sooner or longer to reduce monthly payments
  4. Removing Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP)
  5. Extending the fixed-rate period of the loan, either with a fixed-rate loan or another adjustable rate mortgage (ARM)

So, When Does it Make Sense to Refinance?

Mortgage Minute - When Does It Make Sense To Refinance

  • When interest rates begin to rise. If you currently have an adjustable rate mortgage or ARM — and it’s going to start adjusting in the near future, consider locking in the interest rate with a fixed-rate loan or extending the fixed rate period with another ARM.

 

  • When your credit profile and credit scores improve. If your credit scores are better and your credit profile is stronger than when you got your last loan, it could be worthwhile to refinance. This is especially true if you had derogatory information like a bankruptcy or a short sale that has finally “seasoned” and is no longer reporting.

 

Mortgage Minute - When Does It Make Sense To Refinance

  • When you need to improve your cash flow. You can reduce your monthly payments by getting a lower interest rate, though the most benefit often comes from going to a longer loan term, especially if you’ve had the current loan for several years. Though this will likely cost you more in interest payments in the long run, it can improve your monthly budget today if funds are tight.

 

  • When you want to pay off your loan sooner. Shifting into a shorter loan term will obviously help you to pay off your loan sooner, but oftentimes the interest rates on 15 year mortgage loans are also substantially lower than 30 year loan products. So, you could be paying your home off soon and with less interest!

 

Mortgage Minute - When Does It Make Sense To Refinance

  • When you need to tap into your equity. Whether it’s for home improvement projects, like repairs and renovations, or for sending your children to college without taking on more expensive ParentPlus loans, the equity in your home could be working harder for you if you’re low on reserves. Cash-out refinances are one way to access your equity, but home equity loan and home equity line of credit options are available as well.

 

  • When you want to consolidate your finances. By refinancing different types of debt into one new loan, you can streamline the debt-repayment process and simplify your finances. It may also help minimize the chances of you missing a payment and having to pay a late fee.

 

  • When it’s time to get rid of mortgage insurance. If you’re like many homebuyers, you might not have put 20% down when you bought your home and have been paying either private mortgage insurance (PMI) or a mortgage insurance premium (MIP), depending on the type of loan.

    Sometimes this premium will drop off once you reach a certain loan-to-value percentage (typically 78 to 80%), or once you’ve had the loan for a certain number of years. If you want to remove mortgage insurance sooner however, you might need to refinance in order to make that happen.

The bottom line and answer to the question “When does it make sense to refinance?” is when it makes financial sense for you!

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