How Do You Know When to Refinance Your Home Mortgage?
Though lowering the interest rate on your mortgage will definitely seem appealing, the decision to refinance, or not to refinance, your home is more complicated than just comparing your current interest rate to newer rate offers. A lower rate or a lower monthly payment might look like savings, but neither necessarily means you will be saving money over time.
Remember, refinancing has its costs. You will pay closing costs on a refinanced mortgage just like you did when you got your original mortgage. Typically adding up to a few thousand dollars, closing costs may take you months of savings to recoup, and those up-front expenses may mean you won’t save anything at all.
Another savings pitfall is refinancing for a longer term to secure a lower monthly payment. While it looks like you’re saving money, over the long term you’ll usually be paying more in interest to your lender, even if you have a better interest rate.
However, this doesn’t mean you shouldn’t refinance your mortgage. You just have to weigh the costs and be sure you’re making a smart decision before you commit.
Do you really want to refinance?
There are a few key reasons you might want to refinance your home:
- You want to reduce what you’re paying in interest over the life of your loan by refinancing to a lower interest rate. This can be a great financial move that saves you money over time.
- You want to reduce your monthly payments with a lower interest rate and/or by extending the duration of your mortgage. While you may have to do this to rein in your monthly costs, be warned that extending your loan duration may well mean you pay more in interest over the life of the loan; even at a lower interest rate.
- You want to consolidate your debt into a single loan. An example of this would be combining your mortgage and home equity loan into a single loan. This can save you money, or at least simplify your personal finances.
- You want to change loan types. Such as moving from an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage for more predictable cost. Depending on the type of loan you have, such as an ARM that’s just about to leave its fixed-rate period, could make a lot of financial sense.
Does refinancing makes sense for you?
However, before you start signing the loan papers, there are a few things to consider.
- Plan on staying in your home for a while. If you will be moving in the next year or two, you’ll probably never recoup the costs of refinancing, which means you’re putting yourself through a lot of paperwork for nothing.
- Take a careful look at your current mortgage and the potential new mortgage to be sure you’re getting the savings you expect. Consider your closing costs and prepayment fees (that is if your current mortgage has one), and see how long it would take you to make that money back. Combined with how long you have left on your current mortgage, and how long you plan to stay in the home, you may find that refinancing doesn’t make financial sense for you.
- Calculate your savings with PenFed’s refinance calculator. Input your mortgage information into the PenFed calculator. The calculation results will then tell you how much you could save every month. This is especially important if you’re looking to lower your monthly payments.
How do I refinance my mortgage?
Refinancing isn’t necessarily as easy as walking into your financial institution. Just like when you took out your initial loan, you’ll have to be approved for it; which includes completing all the paperwork.
Be prepared. Here is what you need to be ready in advance:
- Good credit. If you need to clear up any credit problems before you apply, you should. A clean credit report will help you get approved, and get better rates.
- Some equity in your home. More equity in your home will typically make it easier to qualify for a loan.
- Enough cash to pay closing costs. However, you may be able to take out a slightly larger loan than you need to include closing costs in that loan. Talk to your lender to see if this is a possibility.
Is refinancing the right choice for you?
If you still think refinancing sounds like the right choice for you, talk to your lender about your options. Just remember, do the math and be sure you’re getting what you want out of your refinance before you sign on the dotted line.