When to Refinance a Home Mortgage

Refinance your home

When should you refinance your home mortgage? There are generally two times you should look into it:

  1. When you have the chance to save money
  2. When it makes it easier to pay your bills every month

Why Refinance Your Home Mortgage?

Knowing when to refinance your home mortgage is usually closely related to why you would want to do it. While every family is different, there are typically four main reasons homeowners look to refinance their mortgage:

  1. To make their mortgage term shorter
  2. To get a lower rate of interest
  3. To switch between a fixed-rate and adjustable-rate mortgage
  4. To access home equity

Shorter Mortgage Term

Anytime interest rates fall enough, it’s worth considering a mortgage refinance. The math doesn’t always work out in your favor, but it also only takes a few minutes to crunch the numbers. If current interest rates are multiple percentage points below your current mortgage rate, then you might be able to shave years off of your total remaining mortgage while having your monthly payment stay approximately the same.

Lower Interest Rate

Lower interest rates don’t just mean the chance to potentially shorten your mortgage. You might also speed up how fast you build equity in the home and save money on the bigger picture. The traditional rule of thumb is to only look into this when mortgage rates are 2 percentage points lower than your current mortgage, but some financial advisors have their clients start looking at 1 point.

Switching the Mortgage Type

Many homeowners start off with ARMs and their lower rates only to see the payments and interest rates go up over time. Switching to a fixed-rate mortgage takes out the future volatility and might save money. Conversely, a switch from a fixed-rate mortgage to an ARM might make sense when interest rates are falling and it can save money on monthly payments.

Accessing Home Equity

If you have been paying your mortgage for some time, then you have probably built up some home equity. Tapping into your home’s available equity can mean you’re able to raise money to accomplish certain goals. These might include:

  • Coping with an unplanned fiscal emergency
  • Consolidating multiple debts into one
  • Financing a big purchase such as a car, vacation, or college education

Variables to Consider

There are times when refinancing your home mortgage might be a savvy money move, but it’s not always about the interest rate, monthly payments, and loan term. You also have to factor in other things.

Mortgage insurance is one of them. A refinance might let you escape this requirement, but it might not.

You also need to consider closing costs. These can include things such as the appraisal fee, credit report, originating fee, and title insurance fee. Collectively, they account for 2 to 6% of the total amount you borrow