Refinancing a mortgage can be a smart financial move when done correctly. It can save you thousands of dollars over the lifetime of your loan and even help you pay off your home faster.
But it can be tricky to know when to refinance your mortgage. There are many factors that go into making such a weighty decision. Homeowners must weigh the costs and benefits of a refinance in their particular situation. Interest rates, income, financial goals, and more can all impact whether or not a refinance is worthwhile.
So when should you refinance your mortgage, and when would it be a bad idea?
Considerations Before Refinancing Your Mortgage
Before refinancing, take a look at the questions below and ask yourself which apply to you.
How long do you plan to stay in your home?
If you are planning to move within a year or so, it may not be the best idea to refinance. Instead of paying fees to refinance, you could set aside the funds for closing costs on a new home instead.
But, if you are planning on staying put, you are in a much better position to afford the costs associated with a refinance. It typically takes a few years to see the savings from refinancing a home with closing costs.
Will your finances change in the next few years?
If you anticipate a drop in income, it can be really beneficial to consider a refinance. The lower monthly payment could help you live more comfortably if you predict a change in your financial circumstances.
On the other hand, if you are expecting a significant increase in income, you might want to consider speeding up your loan terms to pay off your home faster.
The right move will depend on your unique individual needs and priorities.
Do you have any financial goals to consider before you refinance?
You’ll want to look at both your long-term goals and your short-term goals — and how refinancing could affect them.
Will you be starting a business? Buying a vacation home or investment property? Sending a child off to college?
All of these factors and more can influence whether you should refinance and if you can afford to. A lower monthly payment can help with your other expenses, but the upfront cost to refinance can eat up your emergency fund, too.
Other Aspects of Refinancing
You’ll also want to consider the following aspects of a refinance to determine which loan terms would work best for you and your home.
If interest rates have recently risen or look to be trending back down again, you might want to wait a while to see if they will drop a bit more. You always want to refinance with the lowest interest rate possible to get the best monthly payment and overall deal.
Likewise, if you already have a comparably low interest rate on your home loan, the closing costs of refinancing will most likely not be worth it for you unless rates drop further.
When you refinance your home loan, you will pay additional fees to the lender, known as closing costs for the administration of the new loan. These can be upwards of $5,000 or 2-5% of the loan purchase price.
To see if you will still be saving money in the long run, you’ll have to weigh out the cost savings with the cost of the refinance over time. You will also need to consider if refinancing will trigger a prepayment penalty. These penalties are rare, and even illegal in some states, but can apply to some mortgages during the first 3-5 years.
Most people go into a home refinance for the lower monthly payment. This is typically done by securing a lower interest rate and/or changing the loan terms to make the loan longer.
The choice to refinance is often driven by homeowners wanting to drop Private Mortgage Insurance (or PMI), thus lowering their monthly payments.
Changing Loan Term
Some homeowners choose to refinance to pay off their homes faster or lower the total amount they will pay by shortening the loan terms.
For example, if you can afford it, refinancing your loan from a 30-year term to a 15-year term can save you thousands of dollars in interest. On the other hand, extending the loan term can lower your monthly payment but increase the time it takes to pay off your home and the overall total payment amount in the end.
Ready to Refinance Your Mortgage?
Refinancing can be a big financial win, but you want to make sure you have all the information to make the best decision.
At Chartway, we offer many convenient mortgage refinancing solutions to help homeowners get the most of their loan terms. If you’re ready to start a refinance, reach out to us to discuss your options! Most applicants will receive a reply within days.