When to refinance a home
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Should I refinance?

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A general guideline for determining whether you should refinance your mortgage is that you should do it only if you can lower your interest rate by at least 2%. While this is a good guideline to follow, it’s not a hard and fast rule when refinancing a house. There are several other factors to consider when deciding if refinancing your home loan is right for you.

1. Mortgage refinancing rates

When refinancing your mortgage, you’re replacing your existing mortgage with a new mortgage. Your new mortgage refinancing rate is partially based on your credit history. So, if your credit score or financial situation has improved significantly since getting your current loan, it may be a good time to refinance.

Of course, you need to find out what your new interest rate will be. The best way to do that is to speak with a mortgage loan officer. They’ll be able to give you a good idea of your potential mortgage finance rate. 

Also, you may be offered the option of paying a point upfront. For instance, if you’re able to pay 1% of the loan out of pocket, you may be able to lower your mortgage finance rate. After speaking with a loan officer to figure out your new interest rate, you’ll be able to calculate your monthly savings and determine whether the cost of mortgage refinancing is worth it.

2. Mortgage refinancing terms

If you refinance your loan several years into the term, keep in mind that this may result in a longer loan term. For instance, if you exchange a 30-year mortgage for another 30-year mortgage after 15 years, you’ll end up paying for 45 years total. Your payments after the refinance will decrease significantly, but you’ll be making payments for many years longer than you originally thought. And you’ll often end up paying more in interest over time. 

On the other hand, if you exchange a 30-year mortgage for a 15-year mortgage after 10 years, you can potentially save thousands of dollars. Even with a lower interest rate, your monthly payments may go up, but you’ll shorten your loan period and end up paying less in interest over time.

3. Mortgage refinancing fees

Mortgage refinancing fees can total several thousand dollars and might include:

  • Mortgage application fee
  • Origination fee
  • Credit report
  • Home inspection
  • Document preparation fee
  • Prepayment penalty
  • Appraisal fee
  • Title examination
  • Flood certification
  • Pest inspection
  • Courier services
  • Title and recording fees
  • Various taxes

Generally speaking, you should be prepared to pay between 3 to 6% of your outstanding principal in refinancing fees.

4. Private mortgage insurance (PMI)

Some homeowners refinance to get rid of private mortgage insurance or PMI, which is required if your loan balance is more than 80% of your home’s value. Eliminating PMI doesn’t always require refinancing, but refinancing your home may be an opportunity to remove this additional expense while restructuring your loan for a lower rate or different term.

5. Your home equity

Another reason homeowners choose to refinance is to build equity faster. Or to leverage the equity they already have. When you refinance a 30-year loan to a 15-year loan, you’ll build equity twice as fast. This refinance strategy will also help you save money in interest because it will only take you half the time to pay off your loan payment.

On the other hand, if you already have equity in your home, you can tap into it to help fund education, home improvements or other unexpected expenses. With this strategy, you may refinance your mortgage loan for more than you currently owe to get access to the cash you need.

6. Your loan type

Some homeowners start out with an adjustable-rate mortgage (ARM) to take advantage of the low initial rate. Then they refinance into a fixed-rate mortgage before the rate increases at the end of the adjustment period.

A fixed-rate mortgage allows you to budget your mortgage expenses without having to worry about future interest rate adjustments. This can make it easier to plan and save for a large purchase, such as a second car or a child’s college tuition.

7. Mortgage refinancing savings

It’s important to decide how long you’ll be in your current home to make sure your savings will outweigh the cost to refinance your mortgage. 

To find out how long it will take to recover refinancing costs, divide the total cost of refinancing by the amount you’ll save on your mortgage payment each month. That number is the length of time, in months, that it will take to break even. 

If you plan to stay in your home longer than it would take to break even, refinancing your loan may be a good idea. To determine your break-even point and how much interest you can save, use our mortgage refinance calculator.

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