Refinancing 101: Why and When to Refinance Your Mortgage

Sometimes refinancing your home makes good financial sense. Other times, it’s best for borrowers to stay the course and work with the mortgage loan they currently have.

How can you know if refinancing is right for you? Ask yourself these questions to decide which path to take.

Do I understand what refinancing involves?

When a person refinances, they move from their current mortgage into a new loan program, often getting new interest rates and a different length of loan term in the process.

Do I need to tap into my home’s equity?

Once you buy a home, your home equity begins to grow. Every mortgage payment builds equity, as does the home’s rising value. Over time, your home’s equity can add up to large amount of cash.

If you need to use the equity in your house for other expenses or purchases, a cash-out refinance may be the solution. Refinancing can free up equity for you to pay down debt, finance a child’s (or your) education, fund a home renovation, pay for travel, a wedding or any other important life event.

Could I refinance into a better interest rate?

Market interest rates fluctuate over time. If you secured your mortgage at a fixed-rate that is considerably higher than today’s rate, it may benefit you to refinance.

Even one interest rate point lower can offer big advantages to your financial picture. It can:

  • Lower your monthly payment and give your budget more breathing room
  • Get you into a shorter-term mortgage and help you pay your home off years early

Talk to your lender about your refinancing options if the current interest rate is lower than the one on your mortgage.

Will I be able to pay my home off more quickly if I refinance?

Owning your home free and clear is a big lure to many consumers. That way, you can feel secure that your property is indeed yours, and you can enjoy spending the monthly mortgage payment money on other things.

Refinancing into a lower interest rate or a shorter-term loan can help you pay off your mortgage months or even years quicker. If being mortgage-debt free is one of your top priorities, refinancing may help you achieve your goal.

Am I paying private mortgage insurance (PMI)?

If you initially financed more than 80% of your home’s price, you probably had to purchase PMI, which is insurance that protect the lender if borrowers default. PMI is expensive and may be increasing your mortgage payment significantly.

As you build equity in your home, you eventually have over 20% of the home’s value covered. Once this happens, you can refinance and have PMI removed. This can benefit you by either lowering your mortgage payment or by helping you pay off your home sooner (by putting what you were paying in PMI toward paying off your home). If you think you’ve built enough equity to remove your PMI, it may be time to refinance.

Do I currently have an adjustable-rate mortgage?

If you opted for an adjustable-rate mortgage, your interest rate fluctuates right along with market changes. If securing a fixed rate is attractive to you, refinancing can accommodate you. Even if your new rate is a bit higher than your current rate, you’ll have the peace of mind of knowing your rate won’t increase in the future.

Would it be advantageous to change my monthly mortgage payment amount?

Sometimes things happen in our lives that make us need to reallocate our funds. For example, one spouse may be out of work or you may have had baby, and a lower mortgage payment would be helpful. On the other hand, you may have gotten a large raise and want to pay a higher mortgage payment to get your home paid off faster.

Refinancing can sometimes dramatically change a borrower’s mortgage payment obligations. This depends on several factors, like:

  • The current interest rate
  • The loan length the borrower finances into
  • The amount of equity in the home

Before you refinance your mortgage loan, think about why you want to do it and make sure it is worth your while. Talking to a reputable lender about your options can help you make a better, more informed decision.