When to Refinance Your Mortgage

Jul 12, 2018, 10:18 AM | Logan Arey
A person uses a calculator to help them decide if they should refinance their home

Pretty much every homeowner asks themselves this question at some point: when should I refinance my mortgage?

Refinancing can end up saving you a lot of money, but it doesn't apply to everyone and isn't always the best move. Whether or not it's a good idea for your circumstances depends on a lot of different variables.

In this post, we'll talk about the best times to refinance as well as the times you probably shouldn't.

What Is Refinancing?

First, let's simply boil down what a refinance is.

Basically, you can think of refinancing as trading in your current mortgage for a new one. Then, the new mortgage will pay off your old one.

Many homeowners do this because it can save them money by lowering their monthly payment. But when do you know it's the right time to refinance?

When to Refinance

The following variables signal that it may be time to refinance:

  • Mortgage Rates Have Gone Down – Conventional wisdom says you should refinance when mortgage rates have decreased 1-2% from your current rate. But it doesn't need to be that significant in order to be beneficial.

    According to The Mortgage Reports, the 1% guideline stems from the 1950s, when mortgages had high closing costs and the loan sizes were small. Back then, the rate had to decrease by at least 1% in order to make sense.

    But today, loan sizes are much larger, so a homeowner can save a lot more by refinancing. For instance (assuming costs on refinancing are low), a decrease of just 0.25% could save you thousands of dollars on your mortgage.

  • Your Credit Improves – If you're already a homeowner, then you know what impact credit scores have on your interest rate. Let's assume you have a mortgage with a higher interest rate because your credit had some blemishes on it when you applied. Now, however, your credit has improved greatly. Refinancing might be a good option so you can lower your rate (and the earlier in your current term, the better).

  • Switching Your Term – Perhaps you've taken out an adjustable rate mortgage (ARM) and that extra-low rate you were paying for five years is about to come to an end. Additionally, it looks like mortgage rates are on the rise.

    In this case, it might make sense to refinance into a fixed rate loan. You'll probably be paying more than you were initially, but you'll have the peace of mind that your rate won't increase any more in the future.

  • Shorten the Life of Your Loan – Shortening the life of your loan could be very beneficial for your future financial goals. Let's say you have a typical 30-year mortgage with 20 years left on it. And say you're nearing retirement and you don't want to be paying off your mortgage in the early years of your retirement.

    You could refinance into a 15-year fixed mortgage and pay off your mortgage before retirement sets in, as long as you're okay with making slightly higher mortgage payments. This could be beneficial in achieving future financial success and could help you take advantage of lower interest rates.

When You Shouldn't Refinance

The following situations should make you think twice about whether refinancing is actually worth it:

  • You Plan on Relocating in the Near Future – There's a term you should get familiar with before refinancing: the break-even point. This refers to how long it will take for you to recoup the closing costs on your refinance.

    So if in a refinance, your closing costs come to $2,000 and your monthly payments decrease by $100, it would take you 20 months to break even. If you plan on moving before then, it's probably not worth your while to refinance.

  • There's No Financial Benefit – This goes along with the 1-2% rule we mentioned above. Yes, you can save even with 0.25% lower than your current rate, but a decrease in rates doesn't apply to everyone. That's why you should consider using a refinance calculator to determine whether or not refinancing will be financially beneficial for you.

The Gray Areas of Refinancing

There are circumstances that make refinancing either beneficial or detrimental, but these cases are very isolated and depend on your personal situation. The following situations can be positive or negative:

  • Taking Out Equity – When you've built up equity in your home and you want to access that money, you can do a cash-out refinance. This can be beneficial if there are financial goals you want to achieve outside of your home, you have medical bills to pay, or you want to make some home improvements.

    Yes, it's exciting to get that large chunk of cash, but think carefully before you do. With a cash-out refinance, you'll take out a bigger loan balance than you previously had and there will be less equity in your home. Additionally, making home improvements is nice, but they often won't recoup the amount of equity you took out.

  • Switching to a Longer Term – Say you're currently in a 15-year fixed but you want to refinance to a 30-year fixed (thus lengthening your term) in order to save money on your monthly payment.

    This could be ideal for you, but understand that you'll be paying thousands more in interest on the 30-year. Just make sure to think ahead and weigh your options before making a decision.

  • Consolidating Debt – You may want to refinance so you can pay off high interest rate credit card debt with low interest rate mortgage debt, which often sounds like a great financial plan. But, before doing so, do a financial analysis of yourself.

    Yes, it's a smart decision to pay off that high interest rate debt, but are you going to fall victim to it again? With the refinance, you'll be taking on more long-term debt. And you don't want to rack up that credit card debt again with your mortgage. It's a double-edged sword. This move can be very beneficial or very detrimental.

Who We Are

If you have any questions regarding whether or not a refinance will benefit you, don't hesitate to contact us at Elevate. You can call us at 888-935-3828 or check out other pages on our site.

Elevate Mortgage Group is a mortgage company that specializes in refinances of all loan types. We want to help you make your financial goals a reality—and we have the experience and expertise to do so.

Logan Arey