If These 5 Things Are True, It’s Time to Refinance Your House

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If you are feeling the effects of inflation and are struggling to make all the monthly payments work, maybe you are going over all of your expenses trying to see where you can cut back. You may be looking at your mortgage payment wishing it were lower. So, when is it time to refinance your home? It depends on a few different factors that we will go over.

First of all, what even does refinancing mean? Refinancing a mortgage is when you get a new mortgage in order to pay off your existing mortgage. Your refinance pays off your existing mortgage completely, and then you are left with new loan terms and a different monthly mortgage payment. Of course, there could be other costs involved like closing costs, origination fees, title insurance fees, credit report fees, and appraisal fees. All of this information is essential to know so you can calculate the break-even point.

The break-even point is the amount of money that your savings from the new lower interest rate exceeds the closing costs. In order to calculate this number, you need to divide the closing costs by the monthly savings. Statistics show that homeowners move or refinance again every 6.25 years. So, the number of months it takes to reach your break-even point is important information to know. The sooner the break-even point, the better.

If you are wondering how much lower your new interest rate needs to be than your current rate, or if it even needs to be lower at all, depends on your goals, when or if you are planning on selling your home, how quickly you want to build equity, and when you need to access that equity or not. There are a few different types of refinance options, and mortgage loan rates, and your goals will determine what you will choose during refinance.

#1 Do You Want a Lower Interest Rate?

Refinancing a mortgage.

National Interest rates often fluctuate over the years. Someone could be paying a 7-9% interest rate and their neighbor could be paying only a 3% rate for a home with the same layout and year built. So, for someone who got locked into a high interest rate because they needed to buy at the wrong time, refinancing can leave you with an interest rate (and therefore monthly payment), that is much lower.

To achieve this goal, you would need to get a rate-and-term refinance. This is also the most common type of refinance. To achieve this, the borrower finances their closing costs, and the principal balance stays the same or only increases slightly (by 5% or less).

#2 Do You Want to Get a Shorter Loan Term?

Refinancing a home.

Although a highly acceptable debt to have is a mortgage, it is still debt. Paying off your home can instill a sense of security, and ownership, and will allow you to significantly lower your monthly expenses after your loan is paid off. Essentially, refinancing to adjust the loan term will save you money in the long run, because you won’t be paying off as much interest.

Borrowers can refinance from a 30-year fixed rate mortgage down to a 20-year or even 15-year fixed rate mortgage. The benefits of a 15-year fixed-rate mortgage help the homeowner build equity in their home much faster, as the beginning years of the 30-year are devoted to exclusively paying off interest. This option is more just due to personal preference, and what you can afford monthly. Some owners choose not to refinance their homes because it could be beneficial to keep their original fixed-rate term.

#3 Do You Need to Access Your Home’s Equity?

Image of using a home for savings.

Let’s face it, most Americans are facing tough financial times. With a lot of people competing for fewer jobs, it might leave some households scrambling to get by. A survival tactic might come down to refinancing your home in order to access its equity.

The type of refinance that homeowners would need to take out to achieve this goal is a cash-out refinance. A cash-out refinance usually increases the principal balance by 5% or more, and the owners either financed the closing costs, took out cash, or a combination of the two. This type of loan will most likely increase your principal and/or monthly mortgage payments. In other words, if you end up cashing out $30,000 and your principal loan is $270,000, the new principal balance would be $300,000. If you keep the same interest rate, you will have to pay off the loan longer, and interest will have more time to accumulate.

#4 Do You Want to Get Rid of Your FHA Loan?

Deciding whether to refinance.

An FHA loan is a loan that the Federal Home Association backs. Often, the interest rates for FHA loans have MIPs (Monthly Interest Premiums), equaling thousands of dollars a year unless the borrower put down more than 10% originally. So, the only way to get out of this type of loan is to refinance. Refinancing can give a pathway to lower interest rates.

#5 Do You Want to Change the Type of Rate You Have?

Refinancing your home.

There are two types of mortgage loan rates: adjustable and fixed. In some situations, it makes sense to have an adjustable loan rate, but most of the time, buyers want to be locked into a lower interest rate. The benefits depend on when you are planning on selling your home. If you know that you will be selling your home within the next few years, you may want an adjustable loan to pay the lower rate before you sell.

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