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How Do You Know When To Refinance Your Home?

Refinancing a home makes sense when it will ultimately save you money or make your monthly bills easier to manage. 

Low-interest rates often incentivize homeowners to refinance their mortgage in order to lower their monthly expenses. Still, the decision to refinance should always be based on your personal circumstances. 

When it comes to refinancing, there is no one-size-fits-all. You have to do what's best for you and what's best for your family. 

Refinancing can be a great financial decision that can reduce mortgage payments, shorten your loan term, consolidate debt, and it can even help you quickly build equity. But you have to use it correctly to help bring debt under control. 

Before you consider refinancing, look carefully at your situation and ask yourself:

  • Is this the right decision for me?
  • How long will I continue to live in this house?
  • How much money will it save me?
  • Is refinancing the right step forward?

This blog will help you explore your options and decide how to know when refinancing your home is the right decision for you. 

How does refinancing a mortgage work?

Before we get into the reasons to refinance, let's talk about how refinancing works and what it actually involves. 

When you refinance your home, you get a new mortgage that pays off your existing mortgage. 

Homeowners with mortgages generally refinance their homes when the interest rates drop, but that's not the only reason why you should consider refinancing your home. 

When does refinancing your home loan make sense?

If refinancing will:

  • Save you money
  • Help you build equity
  • Pay off your mortgage faster
  • Consolidate debt

Then it's generally a good idea. 

Even if you have a relatively new mortgage, you might be able to benefit from refinancing. In this case, you could lower your interest rate to a rate that could decrease your monthly payment and reduce the interest you have to pay back over the entirety of the loan's lifespan.

So, when is it a bad idea to refinance your mortgage?

You should avoid refinancing your home if:

It'll take you too long to break even

Refinancing costs money. There are lender’s fees, title exam fees, recording fees, attorney's fees, etc. There's no point in refinancing if it will take you many years to save the money you spent to refinance. Always do the math before refinancing. 

It costs you more in the long run

Depending on the type of refinancing loan you go with, it could end up costing you more in the long run. So, you might feel like you're benefiting now, but you're actually spending more than you initially wanted to. For example, if you get a loan with a low variable interest rate for the first 5, 7, or 10 years, and then it changes to a fixed-rate prevailing at that time, you may end up paying more later if interest rates go up.

You already have a low fixed-rate term

If the new fixed interest rate will be lower by at least ¾ of a percent than what you currently have, then usually it will benefit you to refinance your home. 

If you are thinking of a low variable interest rate loan, consider whether it is likely to increase in the future due to inflation or other factors. Variable interest rate mortgages are riskier than fixed interest rate mortgages and this is why their interest rates are low at the beginning and seem attractive. 

Be sure to do the math, review the numbers with your lender, your attorney, and assess your risk tolerance level before making a decision. 

You can't afford your closing costs

These costs include appraisals, origination fees, and other fees associated with closing a loan. If you don't have the cash ready to pay these, you won't be able to refinance. 

You’re planning to move in a couple of years

If you're planning on moving out of your current home in the next two years or so, then refinancing probably isn't the best move for you.

You have a low credit score

If your credit score is lower now than what it was when you took out your mortgage, then you might struggle to get approved for a refinancing loan. 

You don't have the budget for a higher monthly payment

If you're considering getting a shorter-term loan, that's great. But, if you don't have the budget to pay off the higher monthly payments, you might cause yourself more stress instead of improving things. 

What to look out for when refinancing your mortgage

Here are four things to look out for when considering refinancing your mortgage. 

1. If you can get lower interest rates

When the interest rates drop, refinancing is the way to go because you can get a lower interest rate on your loan. This will reduce how much you have to repay every month.  

Having a high credit score will help you get a better interest rate when refinancing your mortgage. You'll need a credit score of around 760 or higher to get the best rate possible. 

Always check your credit report to get an understanding of where you stand. 

If you have missed any recent payments or unpaid credit card bills, you'll come across as a risky borrower and the bank might not even let you refinance your home.

2. If you'll gain access to your home's equity

Gaining access to your home's equity through cash-out refinancing is often used to gain access to additional funds. 

How this works is that you refinance your home for a higher amount than what you owe on your current mortgage, and you take the difference away as cash. Homeowners often use this cash for renovations or their child's college tuition. 

Carefully consider whether this is worth it because the monthly repayment on this type of loan can be pretty high, and you will end up with less equity in your home than before. Plus banks might view you as a risky borrower in the future. 

Always consult with experienced, financially-knowledgeable professionals like the team at Meimaris Law for more information about your home's equity and refinancing. 

3. If you can acquire a shorter loan term

One of the great benefits of refinancing your mortgage is acquiring a shorter loan term. 

For example, if you refinance a 30-year loan to a 15-year mortgage, your monthly payment will increase, but you will cut your loan duration in half. 

This type of benefit is ideal for homeowners who have received a higher income than they initially had when applying for a mortgage and can now afford higher monthly payments. 

Cutting your loan in half doesn't just reduce the number of years you have left to pay either, it also reduces the amount of interest you'll have to pay over the term of your loan.

Remember, if you don't have the budget available to pay a shorter loan term then this is not the right option for you. 

4. If you can switch from an adjustable-rate to a fixed-rate loan

Some homeowners will refinance their mortgage if they want to change from an adjustable-rate to a fixed-rate loan or vice versa. 

For example, you might want to move to an adjustable-rate mortgage if you plan to sell in a couple of years and don't mind risking the increase in rates. 

Refinancing all depends on what you want out of your loan at the end of the day. If the benefits available to you are worth refinancing for, then refinancing is the way to go. 

Is refinancing worth it?

If refinancing will help you save money or reduce the length of your loan, then it's worth the time, work, and money. 

How to know when or whether to refinance your home is an important decision to make. Finding the right way for you can be tricky if you have to do it alone but with a talented team by your side, you can easily reach your refinancing goals. 

If you're not sure whether you're in a position to refinance your mortgage or not, then consider talking to an experienced real estate lawyer to help you figure it out.

The team at Meimaris Law would be happy to help you understand the process of refinancing your home and to review your particular situation with you. 

With over 25 years of experience dealing in real estate law, we can guide you and make the refinancing process as easy as possible for you. 

Get in touch today for a free consultation with our team to talk about how we can help you with your real estate legal needs.

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