When Should You Refinance Your Mortgage?

A home is likely one of the biggest financial investments you’ll make in your lifetime. And there are ways you can take advantage of the mortgage you’ve taken out for it to help you reach your financial goals. Refinancing may be one of these strategies.   

If you’re unsure about refinancing, read on to learn more about the reasons people refinance and whether or not it may be right for you.

What’s a Refinance?

A mortgage refinance refers to the transaction that occurs when you get a new mortgage to replace your current mortgage. You’d pay off the old mortgage with the new one, and your new one would typically have more favorable terms.

Reasons to Refinance 

There are a handful of reasons your current mortgage may not be working for you or maybe you simply need some cash to pay for a big purchase. Check out some of the most common reasons to refinance below. 

Secure a Lower Interest Rate 

One of the most common reasons that people refinance their mortgage is to get a lower interest rate. If rates were particularly high at the time you got your mortgage, and they’ve dropped since then, you may want to consider refinancing to secure that lower rate. A lower rate could mean a lower monthly payment and could help you save a significant amount of money over time.  

Change Your Repayment Term 

There are multiple reasons you may want to refinance to change your repayment term. For example, if you’re struggling to meet your monthly payment, you may want to consider extending your term to potentially decrease your monthly bill.  

You may also be able to do the opposite and shorten your current term. Doing this may enable you to enjoy lower interest rates, but a shorter term could also mean increased monthly mortgage payments. 

Convert Your Current Mortgage to a New Type 

If you have an adjustable-rate mortgage (ARM), you know that your interest rate has the potential to fluctuate, but this isn’t always a good thing. For a more predictable mortgage payment, many homeowners opt to convert their ARM into a fixed-rate mortgage, which allows for more stable mortgage payments for the life of the loan.  

It’s also possible to convert your fixed-rate mortgage into an ARM which may be a good option if interest rates are falling. 

Tap Into Home Equity 

If you have enough equity in your home, you may want to consider a cash-out refinance to pay for whatever you need to. Many homeowners take cash out for renovations or home improvements that can help increase the value of their home. But you can also use the cash for purchases like a car or to consolidate your debt.

Before You Decide to Refinance 

Refinancing isn’t for everyone. While the benefits may be attractive, there are a number of factors you should take into consideration to understand if a refinance could truly benefit you and help you with your financial goals.  

Learn the Refinancing Details 

Knowing how refinancing works is imperative. Similar to a purchase mortgage, there are closing costs and fees you need to keep in mind when you’re refinancing. Make sure to check with your lender to get the full scope of any upfront costs and keep this in mind to determine if refinancing is worth it for you.  

Understand Your Own Financial Goals 

Whether you want to reduce your monthly mortgage bill or need some cash to invest back into your home, it’s important to know both your short- and long-term financial goals. Take a look at your current finances, where you want them to be in the next couple years and what you want to do with your current home in the future (i.e. set your roots in the home, make home improvements, move to a new neighborhood, upsize, etc.) These factors will help you know what to do. 

Consult a Professional 

If you’re unsure about embarking on a refinance journey alone, it doesn’t hurt to speak with your lender, dedicated loan officer or financial advisor. They may be able to help you better understand where you are currently concerning your finances, what are the next steps to take towards your goals and whether or not a refinance is right for you now or in the future.  

The Optimal Time to Refinance 

Timing is actually one of the most important factors to help decide whether you should refinance or not. There are typically a couple ideal times. 

Credit Score 

Lenders typically look at your credit score to understand how likely you are to pay back debt. A higher credit score generally means you’re less likely to miss a mortgage payment. So, if your credit score has increased since the time you applied for your mortgage, you may be able to qualify for a lower rate if you refinance.  

Interest Rates 

Perhaps one of the most popular times in which people refinance is when mortgage interest rates have dropped since they locked in their original rate. Because your interest rate contributes significantly to your monthly mortgage payment, refinancing to a lower rate could decrease your payments and help you save more money for other monthly necessities. 

Should You Refinance? 

While there are many reasons to refinance and many factors to consider before refinancing, it can be worth it to do your due diligence and find out if it will work for you. To help ensure that you’re making the right decision, it doesn’t hurt to talk to a professional to get their opinion. Maybe it won’t be the right time right now, but it may be in the future. All you have to do is ask. 

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.