When You Should Refinance Your Mortgage

Written by: Lori Gracing

When you buy a home, you take out a mortgage to help pay for it which you then pay back (with interest) in monthly installments. When refinancing your mortgage, you’re simply replacing your first mortgage with a new one. While this may seem like a waste of time, refinancing your mortgage can be a great way to take advantage of lower interest rates or to move from an adjustable-rate mortgage (ARM) into a fixed-rate mortgage (FRM).

The challenges of refinancing come when you have to factor in all of the closing costs and other hidden fees that you also owed when you took out your first mortgage. To determine whether or not new interest rates are low enough that you’ll actually save money in the long run, you’ll have to factor in these costs. It will take a lot of work and quite a bit of time, but refinancing may be a great financial decision.

When To Refinance Your Mortgage

You want to take advantage of lower interest rates. Maybe you signed up for your first mortgage when the market was less friendly and rates were much higher. Rates are currently at a historic low, so now is a great time to refinance. If you manage to reduce your annual percentage rate (APR) by even one percentage point that can be enough to save you a great deal of money.

Your credit has improved. Many first-time homebuyers don’t have much credit at all, and that can lead to them paying higher interest rates when they first obtain a mortgage. After paying off your mortgage for a number of years, your credit score will reflect that consistency and may be high enough to qualify you for a much lower APR.

You want to pay off your loan faster/slower. When you first sign up for a mortgage, you select the length of time you’ll pay off your loan, usually between 15 and 30 years. If finances change (which they often do for new homebuyers), you may find yourself suddenly able to afford a much higher monthly payment. If so, refinancing will enable you to pay your loan off faster and help reduce the amount you pay in interest overall. If, however, you find you can’t keep up with the payments you thought you could, refinancing can help extend your loan term and give you monthly payments that are much more manageable for you.

You want to switch loan types. Many people initially sign up for ARM’s when interest rates are high because they don’t want to be stuck paying an inflated APR for the entirety of their mortgage. With interest rates at a historic low, you may want to switch over to an FRM to lock down the lower interest rates.

You want to get extra money. You have the option of refinancing with a mortgage loan higher than what you owe, giving you a bit of extra money to do whatever you see fit with. Many people use this as an alternative to a home equity line of credit; it lets you turn your home’s equity into cash.

How To Get A Good Rate

Use a refinance calculator. There are plenty of refinance calculators online that can help you determine whether or not refinancing your mortgage will help you save money. Factor in any and all costs in both the short and long term in order to determine whether or not refinancing makes financial sense for you. If you’re unable to afford to pay closing costs outright, you may have to loop them into your loan, which will extend the length and the amount of interest you pay. These are the things you have to consider beyond just nabbing a lower APR.

Have the best credit possible. If your credit it is in the tank, chances are that refinancing your mortgage is not the right decision for you. Good credit scores show lenders that they can trust you and are always the first criteria for a low interest rate. But if your credit is subpar, that doesn’t make refinancing impossible. There are steps you can take to improve your credit, like building it through consistent and timely payments on a credit card.

Reduce your debt. Your debt-to-income ratio (DTI) is the percentage of your gross income that’s being used to pay off debts. The lower the DTI, the better. Lenders are reluctant to lend to people carrying a lot of debt, so paying off some of these will help improve your financial fitness for a refinances mortgage.

Shop around. Like any financial decision that involves choosing whom to buy from, you should never settle on the first refinancing mortgage rate you find. There are many different options such as big banks or credit unions that will offer substantially different APR’s and fees that you have to consider. A mortgage broker can help you find the best lender, but will come with an additional cost. Search online to find what baseline interest rates are being offered and go from there.

Check with your original lender. Once you’ve shopped around, try going back to the lender whom you received the initial mortgage from. If you’re able to come back having qualified for a lower interest rate elsewhere, chances are that they’ll offer to match or beat that rate in an attempt to keep you as a customer. They also may waive some of the fees of refinancing that will go a long way towards reducing overall cost.

Refinancing your mortgage can be just as difficult as it was to obtain a mortgage in the first place, but it’s often a smart option due to the changing market rates. Improvements in finances are common among new homebuyers as you career takes off and promotions elevate you to a new financial tier. Taking advantage of an increased income by paying off your mortgage faster at a lower interest rate is one of the best financial decisions you can make.


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When You Should Refinance Your Mortgage

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