What to consider when refinancing your home

Refinancing your home can be a strategic move depending on your needs and circumstances.

When interest rates decline, mortgage refinancing becomes a particularly popular topic. Deciding to refinance your home can have many advantages, including lower monthly payments, decreased interest rates, more favorable loan terms, and the ability to tap into your home’s equity.

Each person’s situation is unique, and it’s important to carefully consider multiple factors to determine if refinancing is the best choice for your situation. 

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"Should I Refinance" Flowchart

What You Need to Consider When Refinancing

When Not to Refinance

Flowchart: Should I Consider Refinancing My Mortgage? 

The below flowchart and information can help guide you in what to consider when refinancing, such as:

• Interest rate trends
• Current loan rates and terms
• Available alternatives
• Motivations for refinancing
• Reasons not to refinance

What You Need to Consider When Refinancing:

Interest Rates: A lower interest rate can reduce your monthly mortgage payments and save you money over the life of the loan. Compare current mortgage rates with your existing rate, and ensure the new rate is significantly lower to offset closing costs.

Your lender should clearly outline all costs associated with refinancing, including your break-even point—the time it takes for your savings to cover the refinancing costs.

Break-Even Point: This is how long it will take to recoup the closing costs with your new monthly payments. If you plan to stay in your home beyond this break-even point, refinancing is likely the right move.

Shortening Your Loan Term

Refinancing to a shorter-term loan (e.g., from a 30-year to a 15-year mortgage) can save you interest and help you build equity faster, but be prepared for higher monthly payments. 

Switching Loan Types: Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can provide stability with consistent payments.Fixed-rate loans usually have higher initial payments than ARMs but offer predictability over time.

Cash-Out Refinancing: If you have significant equity in your home, a cash-out refinance allows you to access funds for major expenses like home renovations, education, or debt consolidation. Even better - you can do a cash-out refinance AND get a lower interest rate AND improve your loan terms all at once if you have enough equity in your home.  

Be mindful of how much cash you take out, as it will increase your loan balance and potentially your monthly payments.

Eliminate PMI: Assess the amount of equity you have in your home. Lenders typically require at least 20% equity to refinance without private mortgage insurance (PMI). Higher equity can result in better loan terms and interest rates.

When Not to Refinance

Short-Term Plans: If you plan to move in the next few years, the savings from refinancing most likely will not outweigh the closing costs (aka the "Break Even Point.")

Higher Interest Rates: If current interest rates are higher than your existing rate, refinancing is not a good idea.

Extending Loan Term: Refinancing to a longer-term loan can result in paying more interest over time, even with lower monthly payments.