Should I Refinance My Mortgage?

Refinancing your mortgage can offer plenty of advantages, including reducing your interest rate and monthly payment, allowing you to change your mortgage term or allowing you to pull equity from the home to pay for other financial goals.

But refinancing isn’t right for everyone. In this article, we’ll help you answer the question, “should I refinance my mortgage?” by explaining how refinancing works, some reasons to refinance and the best time to refinance your mortgage.

How Does Refinancing A Mortgage Work?

When refinancing a mortgage, you essentially replace your current home loan with another. You apply for a mortgage, just as you would when you’re buying a home. If approved, the refinance loan will pay off your current mortgage and moving forward, you’ll make payments on your new refinance loan rather than your original mortgage.

Once you have your new mortgage, you’ll be eligible for the same mortgage interest tax deduction as with your original mortgage. However, if you do a cash-out refinance (meaning you take equity from your home in cash), you can only deduct the portion of interest paid on that amount if you use the money for certain home improvements.

Here’s a step-by-step guide for refinancing your mortgage:

1. Know why you’re refinancing. We’ll go over some reasons why you might refinance your loan. Make sure you understand why you’re refinancing and whether its helping you meet your ultimate objective.

2. Check your credit score. When you get a mortgage, regardless of whether it’s an original home loan or a refinance loan, your credit is a major factor in qualifying and determining the terms of your loan. Check your credit before applying to ensure you meet the requirements.

3. Shop around for a loan. You can refinance with your current lender, but don’t necessarily have to. Make sure to shop around for a lender that will offer you the best rates and a loan that fits your needs. Once you find the right lender, apply to refinance.

4. Submit your paperwork and get an appraisal. To qualify for your loan, you’ll have to provide financial documents such as tax returns and W-2 forms. You’ll also have to provide documents about your assets and liabilities. You may also need to get an appraisal to determine the market value of your home and the equity you have.

5. Close on your loan. Refinance loans have closings just like any other mortgage. Once you close on your new loan and pay closing costs, your old loan will be paid off and you’ll start making payments on your new mortgage.

Why Should I Refinance My Mortgage?

There are plenty of benefits to refinancing a mortgage. Below are some of the reasons you might choose to refinance your loan.

You Can Select A Different Loan Term

When you borrow a home loan, you usually choose between a 15-year or 30-year mortgage. When you refinance your loan, you can choose a different loan term.

For example, you could refinance from a 30-year to a 15-year loan to pay off your home more quickly. On the other hand, you could refinance from a 15-year to a 30-year loan to lower your monthly mortgage payment. By making your payment more affordable, you’ll have more money in your budget to put toward other financial goals.

You Can Put More Money Towards Retirement

Paying off their home is a major financial goal for many homeowners. But it’s also important to save and invest for other goals, including retirement.

Refinancing your mortgage can help you put more money toward retirement in a couple of different ways. First, if you can lower your monthly mortgage payment, you could put the leftover money in your budget toward your retirement fund.

Alternatively, you can use a cash-out refinance to pull equity from your home, which you can use to help you boost your retirement. You can use the money to pay off debts, make home renovations or build an emergency fund, which could help prevent you from dipping into your retirement savings.

You Can Obtain A Lower Interest Rate

One of the greatest benefits of refinancing a mortgage – and a reason many people did in 2020 and 2021 — is the opportunity to get a lower interest rate. This could happen if the market interest rates are lower or if your credit has improved, allowing you to qualify for a better rate.

Lower interest rates on home loans come with some serious advantages. Not only can a lower interest rate help lower your monthly payment, but it will also reduce the amount you pay in interest over the life of your loan.

It’s important to note that depending on the housing market and economy, you won’t always be able to refinance for a lower rate. If you’re refinancing for another reason, it’s important to consider what your new rate would be, so you don’t end up paying significantly more.

You Can Switch To A Fixed-Rate Mortgage

Not only can you change your loan term and interest rate when you refinance your loan, but you can also change the type of interest you pay.

When you borrow a home loan, you can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). With a fixed-rate loan, you’ll pay the same interest rate over your entire loan term. But with an ARM, your rate can change throughout the life of the loan.

While ARMs can be attractive during certain times, especially when interest rates are low, those benefits can often be short-lived. And as interest rates increase, so will the rate on your loan. Luckily, refinancing your mortgage can help you switch from an ARM to a fixed-rate loan.

Of course, you can refinance to switch from a fixed-rate mortgage to an ARM, too, if you feel that’s a better fit for your financial situation.

You Can Use The Cash To Pay Off Debts

We’ve already talked about how a cash-out refinance allows you to pull equity from your home. In other words, you refinance your current loan for an amount larger than your what you currently owe and take the extra money in cash, which reduces your home equity.

The money from a cash-out refinance can be used for any purpose, but they’re a popular option for consolidating debt, especially those with high interest rates. Because the rate on your refinance loan is likely to be much lower than the interest rate on credit cards and other high-interest debt, you may be able to pay them off faster or at a lower cost.

It’s important to note that if you use the money from your cash-out refinance to pay off debt, you may not be able to deduct the interest on that portion of your loan. Generally speaking, you can only deduct the interest on the portion of a cash-out refinance used for home improvement products that increase the value of your home.

When Should I Refinance My Home?

Whether or not to refinance your loan isn’t the only decision you’ll have to make. It’s also important to consider when you should refinance. After all, it’s important to apply for your new loan at the right time to make sure you get all the benefits.

When You Have A Solid Credit Score

Your credit score is an important factor in qualifying for a refinance loan or any other mortgage. Lenders require a minimum credit score to qualify.

Your credit score doesn’t only affect your eligibility. It also affects the mortgage rates you could be eligible for. And the better your credit score, the better the interest rate you can get.

If your credit score needs some improvement and may prevent you from getting a good interest rate on your loan, it may be worth waiting until your score increases to apply for a loan. To help increase your score, make all payments on time, work on paying down your debt and don’t make a big purchase on credit. Don’t apply for new credit, either. Hard inquiries bring down your score and too many applications for new credit may indicate you’re strapped for cash.

When You Have Financial Stability

It’s important to make sure all your financial ducks are in a row before you refinance your loan. We’ve already talked about how your credit score will affect your loan eligibility and interest rate. Another important factor is your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward debt. You’ll need a DTI under your lender’s requirements to qualify for a refinance loan.

Aside from your credit score and DTI, you should consider your overall short and long-term financial goals. Consider what you expect your finances to look like several years in the future. Ideally, you want to refinance to a loan amount you can easily afford.

It’s also important to remember that refinance loans, just like other mortgages, require closing costs. If you’re considering refinancing your loan, be sure to save for those costs or factor them into your new loan cost.

When You Understand Mortgage Refinancing

A good rule of thumb for mortgages and any other financial decision is not to take advantage of anything you don’t understand. If you’re considering refinancing your home, make sure you fully understand how a refinance works and what the implications are.

First, make sure you understand the refinance process and the different options available to you. You should also understand the costs required. Along with the closing costs required on these loans, you could also be on the hook for a new home appraisal.

Finally, if you have any questions throughout your loan refinance, reach out to your lender before closing on your loan.

When Interest Rates Are Lower

We’ve already talked about how refinancing your loan can help you get a lower interest rate on your mortgage. But that only applies if interest rates are lower when you refinance.

If you’re considering refinancing your mortgage, look into the current market interest rates. If interest rates are lower than yours, then refinancing could be a great option. But if interest rates are higher, it’s worth considering whether other benefits will outweigh the potential increased costs of your new loan.

When You Know You’re Not Moving Anytime Soon

Refinancing can save you a lot of money on your mortgage, but only if you plan to stay in the home for a while.

As we’ve mentioned, there are financial savings available when you refinance your mortgage and get a lower interest rate. But these loans also require closing costs, which make them more expensive at first.

Eventually, you’ll reach the point where your interest savings will outweigh the closing costs. This is known as your breakeven point. If you sell your home before the breakeven point, your refinance won’t be worth it. But once you reach your breakeven point, you’ll start saving money on your loan.

Mortgage Refinance FAQs

Is refinancing worth it?

Refinancing your mortgage is worth it if the borrower is able to save money monthly on their mortgage payments while also maintaining financial stability in the future. It’s also worth it if the borrower uses a cash-out refi to meet other financial goals or make improvements to their home. However, there are also cons to refinancing, so it’s important to consider whether it will be worth it for you.

How soon can you refinance a mortgage?

In most cases, you’ll be eligible to refinance your mortgage after you’ve made at least 6 monthly loan payments, at which point you’ve likely been in the home for 7 months.

How much does it cost to refinance a mortgage?

When you refinance your loan, you’ll have to pay closing costs. According to Freddie Mac, the average closing costs on a refinance loan are $5,000. Your closing costs will depend on your lender, the type of mortgage and where you live.

How much can I save by refinancing?

The amount you can save by refinancing depends on several factors, including your old interest rate, new interest rate, loan term and closing costs.

The Bottom Line: Refinancing Your Mortgage Is An Option Many Homeowners Have

Refinancing your mortgage can offer plenty of benefits, including a lower interest rate and monthly payment, a new loan term, a more predictable interest rate or money from some of your home equity. If you’re ready to refinance your loan, get started on a mortgage refinance.