Should I Refinance My Mortgage

A mortgage refinance is a process in which you obtain a new mortgage to pay off your existing mortgage. As a homeowner, you can choose from all the mortgage options accessible to home buyers. Understanding the different options can assist you in selecting the best loan for your second home purchase.

Refinancing your mortgage may provide relief by lowering your monthly payments and helping you save money in the long term. At the same time, refinancing might be difficult, mainly if your credit score could be better or you’re still determining what to expect. 

When you refinance, you essentially take out a new loan on your property, usually for the remaining balance (although not necessarily). Ideally, this new loan has better terms than your previous one. This is determined by various factors, including current mortgage rates, the amount of equity you have in your home (i.e., how much of the loan you’ve already paid off), and your credit score at the time of application.

When should you refinance your home?

Consider current mortgage rates while considering whether to refinance. The math is more complex than comparing the interest rate you locked in when you were accepted for your mortgage to the rate you may currently qualify for. Various types of refinancing alternatives are available, each with its own advantages and disadvantages.

• Monthly after-tax savings (new payment versus old payment, after any tax-favored treatment)
• The amount of time you intend to spend at the residence
• The expense of getting a new mortgage.

When weighing your alternatives, remember to include the closing fees associated with refinancing in the closing fees. You’ll also need to know the loan’s closing costs to calculate the break-even point, which occurs when the savings from a lower interest rate outweigh the closing fees. To arrive at this stage, split the closing costs by the monthly savings from the new payment.

Reasons You Might Not Want to Refinance

Refinancing typically requires that you have a specific amount of equity in your house. If you don’t have it, refinancing can be challenging. The basic rule of thumb for refinancing is that lenders want at least 20% equity in your property, although there are certain exceptions.

Have you gone through any problematic financial times since getting your first mortgage? Assume your credit has deteriorated since you first received your mortgage. Even if cheaper interest rates are offered, you may be unable to refinance your mortgage.

Some expenses are associated with refinancing your mortgage, just as when purchasing your first house. The closing costs for a refinance include application, loan origination, and appraisal fees. If you don’t have enough money to pay closing fees upfront, you can roll them into the new mortgage. But this is only sometimes the most excellent option. Adding those extra charges to your new monthly mortgage payments may cancel out any savings you would have gotten from refinancing.

Are you planning a move soon, or do you have a profession that requires frequent relocation? Refinancing may not make sense because it takes time to recuperate the initial closing expenses.

What to know before you refinance

Whatever your motivation for refinancing, you’ll want to work out a few numbers before applying. 

• Your current interest rate: 

Look at your most current mortgage statement to validate your interest rate. Because even minor fractions of a percentage point can add up, it’s critical to know the correct amount, not simply “about 6%.” If rates have dropped, you may calculate how much you would save. However, if rates have risen, examine if the other advantages of refinancing outweigh the additional interest.

• An estimated amount for your refinance:

Whether you’re simply refinancing the remaining balance on your mortgage or trying to take out a larger loan, have that cash ready. Closing expenses associated with refinancing typically range between 2% to 6% of the new loan amount. Knowing how much you will borrow allows you to estimate the charges.

• How long do you plan to stay in the house:

To save money by refinancing, you need to determine your break-even point. This is when your refinance savings exceed the amount you spend on closing expenses. 

 Takeaways 

Refinancing can be a good financial option if it reduces your mortgage payment or reduces the term of your loan, or allows you to build equity more quickly. When utilized properly, it can also be an effective tool for debt management. Before refinancing, consider your financial condition and ask How long you intend to live in the house. How much money will I save from refinancing?

Remember that refinancing costs between 3% and 6% of the loan principal. It takes years to recoup the investment through savings from a reduced interest rate or a shorter term. If you don’t plan to stay in your house for more than a few years, the expense of refinancing outweighs any possible savings.

It’s also worth noting that a savvy homeowner is continuously looking for ways to pay down debt, increase equity or save money, and eliminate their mortgage payment. Taking money out of your equity when you refinance usually does not help you achieve any of these goals.