When and When Not To Refinance Your Home
Written by Jason Nelson on February 28, 2018
A mortgage refinance allows borrowers to replace their existing mortgages with new loans that often have better terms and conditions.
But even though a mortgage refinance can deliver a series of benefits, it requires a home appraisal, a title search, and closing fees, just like the original mortgage. Not to mention that a mortgage refinance can have terms and conditions that may not fit the financial situation of every person. That being said, it’s important for borrowers to determine if their reasons for refinancing offer true benefits before applying for a mortgage refinance.
When to Refinance a Mortgage
Some of the best reasons to refinance a mortgage include, without being limited to:
- A lower interest rate – Refinancing a mortgage makes sense when the new mortgage reduces the current interest rate by at least 1%. For example, if a homeowner decides to refinance a 30-year fixed-rate mortgage on a $240,000 home, with an interest rate of 6.5% and 20 years left on his or her mortgage, into a new 20-year mortgage with an interest rate of 5.5%, he or she will reduce the monthly payment by $121. The savings could add up to roughly $29,000 over the life of the new loan. Besides generating hefty savings and decreasing the size of monthly payments, a lower interest rate will also increase the rate at which homeowners build equity in their homes.
- A shorter loan term – Sometimes, it makes sense to opt for a new mortgage with a lower interest rate, but without much change in the monthly payment. In that case, the homeowner will be able to cut several years off the initial mortgage term.
- Equity – Many homeowners refinance their mortgages for the purpose of borrowing cash against their home equity. Whether a borrower intends to opt for a traditional home equity loan or for a home equity line of credit (HELOC), it’s important to have a good reason for tapping into home equity, such as consolidating debt, financing major home improvements, or covering the cost of college education.
- A fixed-rate mortgage – Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can be a sound financial strategy. Because the periodic adjustments associated with ARMs often result in rate increases, converting to a fixed-rate mortgage will eliminate concerns over future interest rate hikes.
While refinancing can offer a series of benefits, a mortgage refinance may not always be the best option for a borrower. It is for this reason homeowners should weigh all the risks and variables before deciding to refinance.
When Not to Refinance a Mortgage
Depending on the financial situation and goals of each borrower, refinancing might not be the best financial decision if:
- The homeowner plans on selling the house soon – Selling soon after refinancing means that the homeowner won’t live in the home long enough in order to enjoy the benefits of a lower interest rate. Plus, he or she won’t be able to recoup the costs of refinancing. In order to determine whether refinancing makes sense or not, a homeowner should consider the break-even point.
- The numbers don’t add up – A homeowner should never assume that a mortgage refinance doesn’t have negative consequences. For instance, switching to a mortgage with a shorter repayment period can translate into a higher monthly payment. Conversely, a lower monthly payment might add many years to the initial loan term. Therefore, each homeowner should assess the pros and cons of refinancing in conjunction with his or her own financial situation.
- The credit score isn’t that great – The credit score plays a major role in determining the creditworthiness of a borrower as well as the interest rate for the mortgage refinance. If the credit score of a homeowner has dropped over time, he or she could miss out on qualifying for a lower interest rate or have trouble finding a lender willing to refinance the mortgage. In that case, the borrower might want to improve his or her credit score before applying for a refinance.
When thinking about a mortgage refinance, homeowners should factor in all these pros and cons before they finalize a deal. If the numbers don’t quite add up to the savings expected, it may be better to hold off on refinancing the mortgage. If you’re looking for mortgage refinancing options, our experienced mortgage brokers at North Florida Mortgage are ready to help you refinance and manage your mortgage with minimum hassle!