7 Signs It’s the Perfect Time To Refinance a Mortgage

Refinancing a mortgage means replacing your existing home loan with a new one — typically in an effort to secure one with better terms or else to take cash out using the equity you’ve built up in your home.

When the Federal Reserve once again cut its targeted federal fund rate by 50 basis points on September 18, 2024, many people began wondering if it was a sign that it was time to refinance.

While refinancing may seem like a no-brainer when interest rates drop, the process is more complex than simply chasing lower rates. There are costs and other factors to consider. However , refinancing can be a smart money move for homeowners .

Here are seven signs that it might be the perfect time for you to refinance your mortgage.

1. You're looking to use your equity to fund a big expense

If you need to access a significant amount of cash — perhaps for a home renovation, college tuition, investing in other property, or eliminating high-interest debt — a cash-out refinance may be a good option.

By tapping into your home’s equity, you can borrow money at a lower interest rate than you would get with a personal loan or a credit card.

2. You can shorten the life of your loan without overextending yourself financially

If interest rates have dropped significantly since your last refinance or home purchase, you might be able to refinance into a shorter loan term without increasing your monthly payments too much.

For example, moving from a 30-year mortgage to a 15-year mortgage may allow you to pay off your home faster and save thousands in interest payments over the life of the loan.

This move could save you a whole percentage point in interest over the remainder of the loan. As long as the higher payments don’t strain your finances, this could help you build wealth by increasing your home equity at a faster pace.

3. You can turn your adjustable-rate mortgage into a fixed one

If you have an adjustable-rate mortgage (ARM) that's nearing its rate adjustment period, now may be a good time to refinance into a fixed-rate mortgage.

Locking in a lower, fixed interest rate can protect you from potential future rate hikes, giving you peace of mind with predictable monthly payments.

This is especially important if you're looking for long-term financial stability and don’t want to risk fluctuating payments when interest rates rise again.

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4. You have enough equity to stop paying mortgage insurance on an FHA loan

For homeowners with FHA loans, refinancing could help eliminate the costly mortgage insurance premiums (MIP). If your FHA loan originated before June 3, 2013, you might qualify for MIP removal when your loan-to-value (LTV) ratio reaches 78%.

However, for FHA loans originating on or after June 3, 2013, you’ll have to refinance into a conventional mortgage (once you reach 20% equity) if you want to remove the mortgage insurance.

This move can save you hundreds of dollars per month, which you could reinvested or use to bolster your savings.

5. Your interest rate will drop

One of the most obvious signs that it’s time to refinance is when interest rates drop. Refinancing to a lower rate can reduce your monthly payments and potentially save you a significant amount of money over the life of the loan.

However, it's essential to factor in refinancing costs and how long you plan to stay in the home. While a lower payment might seem attractive, refinancing might not be the best decision if you don't plan to stay in the house long enough to recoup the closing costs.

It’s suggested to refinance only if your new rate is at least 0.50-0.75 percentage points lower than your current rate.

6. You need to consolidate debt

If you're carrying high-interest debt from credit cards, personal loans, or an auto loan, a cash-out refinance can offer a way to consolidate that debt into your mortgage at a much lower interest rate.

This can reduce your total monthly payments and save you money on interest in the long run. However, it’s important to be aware that you'll be stretching this debt over the life of your mortgage, which could be 15 or 30 years.

Think of it this way: while you’re paying off your home and your debts over a longer period, you’ll still likely end up saving money in the long run as compared to the cost associated with carrying the payments on a high-interest credit card.

7. Your situation has changed

If your financial situation has improved since you took out your mortgage — whether through a better job, an increased income, an improved credit score, or a lower loan-to-value (LTV) ratio — you might now qualify for a better interest rate.

Even if national rates haven’t dropped significantly, your improved profile may open the door to refinancing opportunities.

This is an excellent chance to reassess your mortgage and see if better terms are available. This could allow you to optimize your loan for the future.

Bottom line

Refinancing is just one of many smart homeowner money moves that can help you get ahead financially .

It’s important to consider more than just the current interest rate; evaluating your financial goals, your home’s equity, and your long-term plans can help you determine whether now is the right time.

Consider these signs as you weigh your options and decide whether refinancing is the right step for you.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).