Is It Time to Refinance? Here’s What You Need to Know

At some point, many homeowners decide to refinance their mortgage loan. There are many reasons to do this, and the process offers numerous advantages. There’s also a downside or two if you refinance at the wrong time. Here are common reasons to refinance and how to do it right.

Why Do Most Homeowners Decide to Refinance?

If you’ve been in your home for a few years, you might be thinking about refinancing your mortgage. It can be difficult to determine whether refinancing is the right choice. Start by thinking about WHY you would do it. There are four smart reasons why homeowners choose to refinance their home loans.

• You want to take advantage of lower interest rates.

  If you can decrease your mortgage’s interest rate, you can end up paying less money every month. This is beneficial to many homeowners who want to free up their budget for other expenses. Refinancing into a lower rate may also decrease the total amount you end up paying for your property.

  If mortgage interest rates have gone down over a percentage point from when you got your mortgage, it may benefit you to refinance. You can use an online mortgage calculator to see how much refinancing may help.

• You want to cash out equity.

  Equity can be calculated by taking the home’s value and subtracting the amount you owe on it. As you make monthly payments, you build up equity in your home. Rising property values increase equity, too.

  Cash-out refinancing pulls some of your home’s equity out as cash to use on other things. If you want to pay off debt, finance important life events like college, or need to update or renovate your home, a cash-out refinance may help you pay for it.

• You want to change your loan term.

  Many people decide to refinance their mortgage loans to either shorten or increase the length of their loan. For example, if mortgage interest rates have gone down, a homeowner may be able to cut five, 10, or even 15 years off the length of their loan by refinancing.

  On the other hand, if your monthly income has decreased, you may want a smaller monthly mortgage payment. You could refinance and lengthen your loan term to get a lower monthly payment.

• You want to get out from under private mortgage insurance (PMI).

  If you financed more than 80% of your home price, you most likely had to add PMI. (This also depends on the type of loan you used, as some programs don’t require PMI). Paying PMI can be costly.

  As you’ve paid your mortgage, made home improvements and as property values rise, what you owe may be under 80% of your home’s value. If so, you can refinance your mortgage loan and get the PMI requirements removed.

What Should You Consider Before Deciding to Refinance?

Refinancing is a big financial decision. Think carefully about it before you make a move.

• Consider your reason for refinancing.

  There are some smart reasons — and some not-so-wise ones — for refinancing. Paying for college, making necessary home updates, and saving money over the long term are good ones. Pulling out equity just “to spend” is not as wise. By deciding why you would refinance before you do it, you can avoid a costly financial misstep that could haunt you for years.

• Think about your finances.

  Just because refinancing is right for your sister, coworker, or neighbor doesn’t mean it’s the best decision for you. Look at your budget, your home’s equity, and your credit score. Weigh those against the interest rate and length of the loan term you would refinance into. For example, if refinancing means having a larger monthly payment, can your income cover that? Does your credit score allow you to get the best interest rates? All these elements should be factored into your decision.

• Talk to a loan officer about your options.

  If you’re considering refinancing, the best idea to ensure you’re making a good decision is to speak with an experienced mortgage loan originator. They can look at your finances and current loan, take into account why you want to refinance, and advise you of your options.

By knowing why you want to refinance and talking your options over with a reputable loan officer, you’ll be able to reach the smartest financial decision for your specific situation.