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When Should I Refinance My Home?

Owning a home is a big financial responsibility. To minimize the monthly and overall cost of your home, you probably did extensive research to make sure that your mortgage was the best deal you could get at the time. However, things change, including mortgage rates. The good thing is that if you find out that you can get a better deal on your mortgage, you’re rarely stuck.

Refinancing your home can save you lots of money – both monthly, and for the duration of the loan. The information below can help you understand how refinancing can save you money and when you may want to do it.

How Refinancing Works

Essentially, refinancing your home is replacing your mortgage with a new one, and the process is very similar to the process of getting your first mortgage.

During the refinancing process, you will have to go through an application process, which will likely require your home to be appraised and inspected. You will present information about your credit and financial history, as well as other documentation about your current mortgage.

In the end, once you close on your new mortgage, you will use the new loan to pay off your existing mortgage. You then resume making payments on your new mortgage for the remainder of its term.

Typical Reasons to Refinance

Although each homeowner may have their reasons for refinancing, there are a few reasons that are the most common. Many homeowners refinance to:

  • Lower Their Monthly Payments
  • Obtain a Lower APR
  • Convert Between Mortgage Types (e.g., Adjustable to a Fixed-Rate Mortgage)
  • Tap into Home Equity
  • Shorten the Overall Length of the Mortgage

How Refinancing Affects Your Mortgage

Refinancing can be a good step, but it’s best to remember that it can have an impact on your finances. You will want to be aware of how it will change the cost of your mortgage – both in the short and long term.

For example, refinancing to lower your monthly payments can be beneficial in the short term. However, if you cannot find a lower interest rate, then you will likely have to extend your mortgage’s term to achieve lower payments. While this decreases your monthly payment at the time, you will end up paying more in interest overall.

In addition, converting from a fixed-rate to variable-rate mortgage and vice versa can affect your finances. Adjustable-rate mortgages often have a lower initial rate, which is locked in for a specified period. If you are planning to leave your home in the next few years, refinancing to an ARM can help you take advantage of those lower rates in the short term.

In general, the smartest refinancing decisions are those that decrease the amount of money you spend on your mortgage overall, and those that allow you to fully recoup the costs associated with refinancing.

How the Time Left on Your Mortgage Impacts Refinancing

Refinancing costs money. In general, you’ll pay approximately 2-5% of your mortgage principal for a refinance. If you do not have long left on your mortgage or you are moving soon, you may not be able to regain these costs.

Although it is sometimes impossible to plan, considering how long you’ll likely be in your home can help you decide whether refinancing makes sense for you.

Factors That Affect Refinancing Rates

If you are planning to refinance, but not sure when, you’ll want to keep an eye out for the best rates. Factors that affect rates at any given time include:

  • Inflation Rates
  • Economic Growth Rates
  • Demand for Mortgages
  • Your Personal Finances – Including Your Credit Score and History

To monitor mortgage rates as they relate to the economy, you can sign up for alerts from a variety of sources online. These types of alerts will keep you aware of the current market, helping you know when to refinance your mortgage.

To account for personal factors, you’ll want to be careful with your finances. Always try to maintain or improve your credit score by making all of your monthly payments on time, paying down debt, and being responsible with credit cards.

Deciding When to  Refinance a Mortgage?

So, is now the right time to refinance? There is one more thing you should consider: your lender. Oftentimes, credit unions can offer excellent rates in comparison to other lenders since they are non-profit and owned by their members.

Like anything else, shopping and comparing the prices you can get from a variety of places will help you get the best deal. If you’re ready to start shopping for a mortgage, you can start by checking out our competitive rates and refinance options.

Learn About Our Refinance Options