Solved! When Should I Refinance My Mortgage?

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Q: I’ve heard that refinancing my mortgage can help me access better interest rates or allow me to change the terms of my mortgage. Since I first took out my mortgage, my financial health has improved and rates have decreased. Does that mean now is a good time to refinance? When should I refinance my mortgage?

A: It’s common for homeowners to wonder, “When should I refinance my mortgage?” The short answer is that refinancing is generally a good idea when you stand to get better terms on the mortgage, can save money through better interest rates, need to access your home’s equity, or want a different type of mortgage. Since there are many variables to consider, a good place to start the research process is to search “how does refinancing a mortgage work?” Refinancing a mortgage is basically trading in the existing mortgage for a new one, which can lead to better interest rates and terms. If you’re considering a refinance, it’s important to understand the full picture, including the benefits of refinancing and when it makes the most sense to do so; this will allow you to get an idea of when the right time is to consider a refinance.

Refinancing may be a good option for homeowners who can decrease their mortgage interest rate by at least 1 to 2 percent.

Most homeowners wonder at some point during the term of their home loan, “Should I refinance my mortgage?” When considering when to refinance mortgage loan terms, some borrowers look at whether they can get a better interest rate on their loan. Generally, if the homeowner is in a place where they can reduce their rate by 1 to 2 percent with a new mortgage refinance rate, this can mean a lower monthly mortgage payment, which will save money over the course of the loan.

Homeowners might be looking into the best refinance mortgage rates for a couple of reasons. First, mortgage rates may have gone down since the homeowner first took out their mortgage. Second, the homeowner may have improved their credit since setting up their mortgage and now qualify for better interest rates than they did back then.

Homeowners who want to shorten their mortgage term as a result of increased income or lower interest rates can benefit from refinancing.

How does refinancing work? In most cases, it’s a matter of restructuring an existing loan so borrowers can get a different term on their mortgage that might work better for their current situation. For example, a homeowner may have initially taken out a 30-year mortgage because the payments fit their budget at that time. But now, the homeowner may be making more money than they did when they first bought the home, so they may choose to refinance to a 15- or 20-year loan term, which will typically increase the monthly payments but will decrease the length of the loan and the total amount of interest paid.

On the flip side, some homeowners may find themselves unable to pay their monthly mortgage amount due to a major life change such as the addition of a child or the loss of a job. In that case, the homeowner might want to refinance their mortgage to a longer term, such as from a 15-year loan to a 30-year loan, or from a 30-year loan to a new 30-year loan, but starting with a lower total balance.

Refinancing can allow homeowners to convert from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa.

Another common reason for homeowners to refinance is to change the type of mortgage they have. For example, a homeowner might have originally chosen an adjustable-rate mortgage and find that the fluctuating mortgage payments are not working with their budget as well as they had hoped. Through the refinancing process, they can change from an adjustable-rate mortgage to a fixed-rate mortgage, which will have a more predictable payment.

Some homeowners may even decide to move from a fixed-rate mortgage to an adjustable-rate mortgage because they might find the lower interest rates and lower payments early in the loan term more attractive. However, it’s important for homeowners to be aware that those rates and payments can potentially increase later on in the loan term.

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Homeowners may decide to refinance in order to tap into their home’s equity.

One of the most direct benefits of refinancing is that homeowners can choose a cash-out refinance in order to access their home’s equity. A cash-out refinance is where part of the equity paid into the home gets paid in cash to the homeowner during the refinancing process. The homeowner then owes that cash back as part of the new mortgage, and that borrowed equity is rolled into the new mortgage payments.

Homeowners can then use that cash however they please. It’s common to use the cash to pay for major home improvement projects, since home renovations can boost the value of the home. That cash can also be used to consolidate debt, pay off an unexpected medical bill, or pay for college tuition, as a few examples.

Refinancing may help homeowners get rid of their mortgage insurance premiums. 

Homeowners might also be able to get rid of their mortgage insurance premiums (MIP) by refinancing mortgage loans. For example, a homeowner may have originally taken out an FHA loan and is now qualified for a conventional loan. Since FHA loans have mortgage insurance premiums for the life of the loan, refinancing to a conventional loan can get rid of that extra monthly payment and free up more cash for the homeowner to use for other bills. However, in order for a homeowner to skip mortgage insurance (called PMI, or private mortgage insurance) on a conventional loan, they must have at least 20 percent equity in their home.

The homeowner may also be in a situation where their home value has increased since they first purchased it. As home value goes up, so does the amount of equity the homeowner has in their home. If the home’s value increases enough to push the homeowner over the 20 percent equity threshold, they may be able to qualify for a mortgage-insurance-free loan refinance to get rid of these mortgage insurance premiums.

Homeowners who are planning to sell their home in the near future or are close to paying off their mortgage will generally not benefit from refinancing.

While refinancing makes sense for many homeowners, there are also situations where it does not make sense. One such situation is if a homeowner plans on selling their home very soon. In this case, the money saved through lower interest rates would generally not cancel out paying the closing costs of the refinance.

Another situation where it would not make sense to refinance is if the homeowner is close to paying off the mortgage. It would simply not make sense to set up a new mortgage when paying off the old one is right within view. Refinancing would likely mean an increased loan term, which would make full ownership of the home take that much longer.

In general, refinancing can be a good option to help homeowners meet their financial goals.

Refinancing can help increase or decrease monthly payments to be more in line with the homeowner’s current monthly budget. Refinancing can also help homeowners shorten loan terms to pay off the home sooner.

The refinance mortgage process can also have a host of other benefits, like helping to get rid of mortgage insurance, accessing the home’s equity in the form of cash, or changing the type of mortgage so that it better fits the lifestyle and budget of the homeowner.

Homeowners can get started by shopping around with reputable lenders to see which company can offer the best mortgage refinance rates and most favorable terms. That way, homeowners can make sure to refinance a mortgage in a way that benefits them by going through one of the best mortgage refinance companies. Homeowners might also ask questions of lenders like, “Can I refinance my mortgage with no closing costs?” when shopping around for the best loan for them. It might also pay to look into using a cash-out refinance calculator to see if cash-out options might make sense while looking at refinance mortgage rate options.