When Should You Refinance a Home?

Perhaps you bought a house at a time when your credit was poor, and you now have a high interest rate. Over time you’ve started practicing good money habits and successfully raised your score. It feels unfair to stay trapped in an interest rate that no longer accurately reflects your credit history. Refinancing your mortgage opens the door to renegotiating the terms of your loan.

Refinancing means to pay off an existing loan and replace it with a new one. There are plenty of sensible motivations for refinancing, but it may not be for everyone. Just like buying a house- you will have to deal with appraisals, title search and app fees. A new loan also means paying new closing costs which may not be worth the savings of a lower monthly rate.

If you’re unsure about refinancing, then consider how long you plan on staying in your home. It makes more sense to forfeit those one-time fees if you expect to stay for a while.

Before you make your decision, it helps to understand the reasons someone would want to take out a new loan. If after looking at the numbers, you find yourself in one of the following situations below- maybe it’s time to refinance.

YOU WANT TO CHANGE YOUR LOAN TYPE

This is the perfect opportunity to change from an adjustable-rate mortgage, or ARM into a fixed-rate loan. And vice-versa.

Adjustable-rate mortgages offer low introductory rates that “resets” during your loan, and if interest rates have gone up then you’ll end up seeing a rise in your monthly payment.  That’s why most borrowers try to refinance into a fixed-rate loan because they view it as a safer bet.

It’s a good move to make if rates are relatively low, but the truth is, no one really knows what will happen to interest rates in the future. In fact, costly ARM resets significantly contributed to the meltdown crisis years ago. Adjustable-rate mortgages were incredibly common back then, but the lesson remains relevant. You never know what may come down the road so staying ahead of any potential trouble is wise.

YOU’VE BOOSTED YOUR CREDIT

Your borrowing and payment history are reflected by your credit score. Lenders look at credit scores to determine your mortgage interest rate. If things are looking better than they used to, you may be eligible for a significantly lower rate. It’s worth the effort to improve your credit score and there are many ways to do it. Practice good financial habits like making on-time payments and paying down your debt. If your score improves enough, you could be on your way to some extra savings.

YOU WANT A LOWER MONTHLY PAYMENT

Sometimes interest rates don’t change significantly enough, but borrowers are still finding ways to save. Loans are typically given out over a period of 30 years, so finding a way to refinance your loan over a longer period of time means the less you’ll have to pay monthly.

For example, let’s say you’ve had your home for 10 years when you consider refinancing. Your loan term was $250,000 over 30 years. Within those 10 years you’ve managed to pay your loan down to $200,000 and chose to refinance for another 30 years on that amount. You will have added an extra 10 years into your loan but have significantly lowered your monthly payments.

This could be an option if you are having trouble making your payments on time. However, please note that you will be paying more in interest over time so consider this option wisely.

Check out if refinancing makes sense for you with the refinancing calculator.