When Should You Refinance Your Home

10/26/2020

Deciding to refinance your home can be a big decision for any homeowner. There are many reasons that people choose to home refinance. Whether you’re refinancing your home for a lower mortgage rate or personal reasons, you should feel confident in your financial decisions.

When you refinance your home, it means paying off your current mortgage and replacing it with a new one. Many homeowners consider refinancing to get a lower interest rate, shorten their mortgage term, or gain access to home equity for emergency funds.

Although refinancing your home can be a great option for you and your family, it is also important to understand everything refinancing entails. We’ve put together a guide to help you understand when to refinance your
home loan or mortgage and whether or not it is the right financial option for you.

How Does Refinancing Work?

Home refinancing works by replacing your existing mortgage with a new home loan. Your new lender pays off your current mortgage and you then make payments towards the new, refinanced mortgage on your home.

There are different options for refinancing your mortgage, including rate-and-term refis, cash-out refis, and cash-in refis. Finding the right loan for you depends on your needs and the goals you want to achieve with a new home loan. For example, a home refi can help you:

  • Lower monthly mortgage payments
  • Reduce the total loan amount you’ll pay for your home
  • Pay off your mortgage faster
  • Gain access to equity in your home

The right kind of home refi can help you achieve your financial goals, but the advantages of each mortgage refinance type often depends on the lender you’re working with. It’s important to talk to your bank or credit union about what mortgage refinancing options are available to you and how their rates, closing costs, and origination fees impact the total refinance costs.

At Arkansas Federal Credit Union, we offer home refinancing options for Arkansans that may be able to help you achieve your financial goals faster with special benefits not offered by other lenders.

When Should I Consider Refinancing?

Many homeowners consider refinancing when mortgage rates are lower than their current mortgage to take advantage of better mortgage rates. However, the total cost of a refinanced mortgage can sometimes make lower rates less advantageous than you might initially think. Understanding the total cost of a refinanced mortgage can help you determine if refinancing is right for you.

In the grand scheme of things, refinancing your home makes the most sense if you are looking to save money or if you plan on staying in your home for several years. It can take several months to reach a break-even point when you refinance your home and you begin saving money. If you plan on selling your home soon, you may not want to consider refinancing your mortgage as it can cost you more money in the long run.

Refinance to Lower Rates

You can use a rate-and-term refinance to reduce your interest rate. If you are refinancing to secure a lower interest rate, most financial experts advise to consider refinancing if you can lower your rate by 2% or more. If you can get a good interest rate, not only will it be saving you money, but it can also rapidly increase the rate you build equity in your home. Additionally, finding a better mortgage rate on your home can decrease your monthly payments, saving you even more money.

Refinance to Shorter Loan Term

You can use a rate-and-term refi to change the term of your mortgage or even use a cash-in refi to pay down a large part of your mortgage as part of the refinanced mortgage. Shortening the term to pay more on principal in each payment or paying off a large part of the principal at once is usually the best option if you’re looking to pay off your mortgage quicker.

Refinancing to Consolidate Debt

Another big reason homeowners consider refinancing their mortgage is to consolidate their debt or gain access to home equity. This type of refinance is called a cash-out refi and allows you to tap into the equity built up in your home. Homeowners may choose to access their home’s equity in order to cover major expenses like weddings, college funds, or remodeling their home.

When You Shouldn’t Refinance

There are times where refinancing your home isn’t the best option for you. If you’re considering refinancing your home, understanding when it might not be appropriate to refinance is important to help you make your decision.

Long Break-Even Periods

While refinancing your home may save you money, it can also take a long period of time before you can start saving. Your break-even period is when your lowered monthly payments offset the refinanced mortgage’s closing costs. Depending on your refinance situation, it may take months or even years before you reach a break-even point and start saving money.

You Don’t Have Money for Closing Costs

Refinancing your home may seem smart if you’re wanting to save money on the home you have. However, because applying for a refinanced mortgage consists of new paperwork, that means new closing costs. You may end up paying the cost out of pocket or at a higher rate than they were before. If you know that the closing costs are going to be unaffordable, you shouldn’t consider refinancing your home.

Doing the math of whether refinancing is the right option for you can be complex. At Arkansas Federal, we can help you understand your options for a refinanced mortgage and if refinancing makes sense for your finances.

Deciding to refinance your home is a big decision to make. If you know you will be in your home for a long period of time, can get lower rates on a new loan, and feel as though you will be a good candidate then you should consider a home loan refinance.

Speaking to one of our mortgage experts can help. Contact us today to see how we can help you save on your home loan.