When is the Right Time to Refinance Your Mortgage?
With interest rates starting to trend downward and talk of future rate cuts from the Federal Reserve, you might wonder when the right time is to refinance your mortgage. When you refinance, you’re applying for a new mortgage to replace the current one. This will give you a new rate, term and monthly payment.
The right time to refinance your mortgage depends on your individual financial situation and goals. If your goal is to reduce your interest rate and monthly mortgage payments, shorten the loan term or tap into your home’s equity, refinancing may be a strategic move in line with your goals.
Reasons to Refinance Your Mortgage
Consider your financial goals when deciding if you should refinance. Here are the top reasons refinancing your mortgage might make sense for you:
1. Lower Your Mortgage Interest Rate
Your interest rate can impact the amount of your monthly mortgage payment. If the rates are lower than the rate on your original loan, you may save on your monthly payment. It may also help build equity in your home at a faster rate because you’re not paying as much in interest.
2. Change Your Mortgage Term
If your financial situation has improved, refinancing your mortgage with a shorter term may result in a higher monthly mortgage payment but it can help pay off a mortgage sooner and potentially save you money on interest. For example, if you have a higher income or have paid off other debts, you may be able to afford a higher monthly payment and a shorter loan term.
Refinancing your mortgage to lengthen the term can reduce your monthly mortgage payment but it will take you longer to own your home outright and you’ll be paying more in interest by stretching out the term. If you are experiencing a loss of income, moving to a lower fixed income or have financial hardship, refinancing to a longer term might be a good option to ensure you can make your mortgage payments and not default on your mortgage.
3. Eliminate Private Mortgage Insurance (PMI)
If you have a conventional mortgage, you’re required to pay PMI if you made a down payment of less than 20%. PMI can be removed on your existing mortgage once you reach 20% equity based on your original loan terms. Sometimes, you might reach the 20% equity position because the market value of your home has increased, even if you haven’t paid 20% of the original purchase price. If that applies to you, refinancing may also reduce the amount of mortgage insurance you pay or remove it all together.
If you have an FHA loan where the mortgage insurance is typically not removable, you may consider refinancing to a Conventional loan. This can lower the amount of mortgage insurance you will pay over the life of the loan, or it can remove the mortgage insurance entirely if you have 20% equity or more based on the current market value of your home.
4. Cash Out Your Equity
A cash-out refinance is where you borrow more than what you owe on your current mortgage and receive the difference in cash. This can be a useful option for homeowners who have built up equity and want to access that equity for home improvements, debt consolidation or other financial needs.
Here are other considerations to help you determine if it’s the right time to refinance:
- Your adjustable-rate mortgage (ARM) is adjusting upward – Converting to a fixed-rate mortgage will provide a fixed payment and may save you money in the long-term.
- Your credit score has improved – If your credit score has improved since you initially took out your mortgage, you may be eligible for a lower interest rate, making it a good time to refinance.
- If you need to change ownership of your home, such as a divorce or other circumstance that would require removing one of the co-owners, you will need to refinance.
The Cost to Refinance a Mortgage
It’s important to weigh the cost of refinancing when determining if refinancing your mortgage is worth pursuing. These are fees paid to the lender, title company and other third parties for services provided in the mortgage transaction. Closing costs alone run anywhere from $3,000 to $4,000 in the Kansas City and St. Louis areas. That does not include the cost of setting up a new escrow account. You should reach out to your lender for a closing cost quote based on your situation.
Most borrowers prefer to roll the closing costs and new escrow account into the new loan balance, but you can also pay these costs out of pocket at closing. Your lender can help you determine which option is the best for you.
Having a clear understanding of your financial goals before refinancing can help you and your Mortgage Advisor make informed decisions and ensure you are in a strong financial position moving forward. Use our refinance calculator or speak to a Mortgage Advisor to get a better idea of the total cost of refinancing and determine if refinancing is right for you.
