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Should I Refinance My Mortgage Now?

If you’re thinking about refinancing and wondering when to refinance a mortgage, consider your specific situation and explore how it benefits you. Paying off an existing mortgage and replacing it with a new one amounts to a major financial decision for most homeowners.

A mortgage refinance can reduce your monthly mortgage payments, shorten the term of your home loan or help you quickly build more equity in your home.

Refinancing your mortgage can also bring debt under control. Before asking yourself whether you should refinance your mortgage now, look at your living situation and financial goals, and consider how long you plan to continue living in your home. How much money could you save by refinancing?

When applying to refinance your mortgage, the process closely resembles the mortgage application process you went through to get your existing loan, except there’s no realtor or home purchase involved. You’ll submit work history and debt-related documentation, and the lender will pull a credit report to review your credit history and credit score.

When to refinance your mortgage

  • To obtain a lower loan interest rate: A 1% to 2% drop in average mortgage interest rates is when you should consider refinancing a mortgage. Though it’s just a couple percentage points, it makes a big difference in your monthly budget and your ability to pay off your mortgage faster.
  • To shorten the mortgage loan term: When interest rates drop, consider refinancing your mortgage to shorten the term of your mortgage and pay significantly less in interest payments over the life of the loan. A popular option is refinancing from a 30-year term to a 15-year fixed rate mortgage.
  • To convert from an ARM to a fixed rate, or vice versa: Switching from an adjustable rate mortgage (ARM) to a fixed rate mortgage — or vice versa — can make sense depending on interest rates and how long you plan to stay in your current home.

Questions to consider prior to deciding whether you should refinance your mortgage

What does it cost to refinance?

When refinancing your mortgage, expect to pay about $3,000 in primary closing fees, depending on your lender. A lender’s loan fees will typically cost around $1,000, and then you’ll pay $450 to $650 for an appraisal and approximately $1,200 to $1,500 in title costs. Closing costs can range between 3% to 6% of the loan amount.

Do you have at least 10% equity in your home?

Without at least 10% to 20% home equity saved up, you’ll likely need to pay for mortgage insurance (PMI), and you’ll receive a higher interest rate when refinancing.

Is your current mortgage interest rate over 5%?

If your existing mortgage is locked in with a fixed interest rate under 5%, refinancing may not make sense — unless it reduces your interest rate by at least 1% to 2%.

What’s your credit score?

If your credit score is around 660 or better, you can likely attain refinancing approval from several lending institutions. Look for ways to improve your credit score to secure the best interest rates when you refinance a mortgage loan.

Will you live in your home for two to three years after refinancing?

Without staying an additional few years, the cost of refinancing probably isn’t worth it. It takes years to recoup the 3% to 5% of principal that refinancing costs when resetting mortgage loan terms.

When to not refinance a mortgage?

Don’t wipe out your home equity or put your home at risk of foreclosure just to pay off credit cards or finance unnecessary expenses. Be realistic about what you can afford to pay toward monthly mortgage payments, which often include the costs of home insurance and property taxes. Save equity for an emergency or apply it toward improving your property or your income potential — something you’ll benefit from long term.

Unsure if you should refinance your mortgage? Call us today at 1.800.205.3464 to speak to one of our mortgage experts or find a banking center near you.

 

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