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When to Refinance Your Mortgage: A Comprehensive Guide

  • Finance
  • Vanessa Norris
  • 9 minutes

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People usually think about refinancing when interest rates are decreasing or staying the same, which is not the case now. Still, switching from your old home loan to a new one might make sense. Read to know more about when to refinance your mortgage.  

when to refinance your refinance

When to refinance your mortgage 

  • When you secure a lower interest rate 

The interest rate on your current loan is one of the best reasons to refinance. It has been a good rule of thumb to refinance if you can lower your interest rate by at least 2%. Many lenders, though, say that a 1% savings is enough of a reason to refinance. A mortgage calculator is a good way to figure out how much some of the costs will be. Reducing your interest rate can save you money and speed up the rate at which you build equity in your home. It can also make your monthly payment much lower. 

  • When you need to shorten the loan’s term 

When interest rates go down, homeowners sometimes can trade in their current loan for a new one with a much shorter term but the same monthly payment. For a $100,000 home with a 30-year fixed-rate mortgage, refinancing from 9% to 5.5% can cut the term in half, from 30 years to 15 years, with only a small change in the monthly payment, from $805 to $817. But if you already have a mortgage at 5.5% for 30 years ($568), a 3.5% mortgage for 15 years would make your payment $715. 

  • When you are converting to an ARM or fixed-rate mortgage 

ARMs usually start out with lower rates than fixed-rate mortgages, but their rates can go up over time and become higher than what you could get with a fixed-rate mortgage. When this happens, switching to a fixed-rate mortgage gives you a lower interest rate and removes your worries about interest rates going up. 

On the other hand, switching from a fixed-rate loan to an adjustable-rate mortgage (ARM), which usually has a lower monthly payment than a fixed-term mortgage, can be a good way to save money, especially for homeowners who don’t plan to stay in their homes for more than a few years. 

These homeowners can lower their loan’s interest rate and monthly payment, but they won’t have to worry about what will happen to rates in 30 years. If rates keep going down, an ARM’s periodic rate changes will lead to lower rates and smaller monthly mortgage payments, so you won’t have to refinance every time rates go down. On the other hand, this would not be a good plan if mortgage interest rates went up. 

  • When you plan to tap equity or consolidate debt 

Homeowners often use the equity in their homes to pay for big expenses like remodeling or sending a child to college. These homeowners may want to refinance because remodeling increases the value of their home or because the interest rate on their mortgage loan is lower than the rate on the money they borrowed from somewhere else. 

Even if this looks good on paper, increasing the number of years you owe on your mortgage is rarely a good financial move. And neither is spending a dollar on interest to get a thirty-cent tax deduction. Many homeowners refinance to get rid of a lot of debt at once. At first, getting a mortgage with a low-interest rate instead of high-interest debt seems like a good idea. Take this step only if you’re sure you won’t be tempted to spend once you’re out of debt, thanks to refinancing. 

Be aware that many people who used to rack up high-interest debt on credit cards, cars, and other purchases will just do it again once they have the credit to do so after refinancing their mortgage. This creates an instant quadruple loss. This could lead to an endless cycle of debt and eventual bankruptcy. 

A serious financial emergency is another thing that can make you want to refinance. If that’s the case, think carefully about all the ways you could raise money before taking this step. In case, if you do a cash-out refinance, you might have to pay a higher interest rate on your new mortgage than if you just changed the rate and term. 

  • When you plan to get rid of private mortgage insurance 

If the value of your home has gone up, you could refinance to stop paying private mortgage insurance (PMI) or mortgage insurance premiums (MIP) on conventional loans or FHA loans. Most commercial mortgages require PMI until you’ve paid off 20% of the loan. MIP on standard FHA loans made after 2013 never goes away until the loan is paid off (with some exceptions depending on the size of your down payment). 

  • When you don’t plan to move soon 

You might also want to refinance if you can get better loan terms and plan to stay in the same place for a while to take advantage of the savings. But you might not want to refinance if you plan to move soon. This is because you won’t have much time to make up for the costs of getting a new loan. 

  • When you have to pay for home renovations 

If you’re having trouble making your monthly mortgage payments, you can refinance to acquire a longer loan term and a lower monthly payment. But, because you will be paying interest for a longer length of time, the loan will be more expensive altogether. 

  • When you plan to get rid of an FHA loan 

Mortgage insurance costs on FHA loans range from $800 to $1,050 per year for every $100,000 financed. You must pay these premiums for the life of the loan unless you put down more than 10%, which means the only way to get rid of them is to acquire a new loan that isn’t backed by the FHA. If you have at least 20% equity left over after the transaction, you can access your home equity through a cash-out refinance. 

When not to refinance 

So, when is refinancing a bad idea? If you recently purchased a home or intend to relocate soon, which will give you little time to recoup the administrative costs of taking out a new loan, refinancing might not be a wise choice. Or if you simply want to spend a lot of money on expensive stuff. 

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How soon can you refinance a mortgage? 

Depending on the type of loan you now have, the type of loan you want to refinance into, and the lender’s requirements, you can refinance your mortgage at any time. If you have a traditional loan, you might be able to refinance as soon as you’d want, barring any conditions imposed by your lender. If you intend to pursue a cash-out refinance, this rule does not apply. The standard rule in this situation is that you must wait six months after receiving your original mortgage before refinancing. Moreover, loans backed by the FHA, VA, or U.S. Department of agriculture have unique seasoning requirements (USDA). 

  • FHA loans: 210 days after closing date 
  • VA loans: 210 days after closing date or after six consecutive payments, whichever is longer 
  • USDA loans: After making consecutive, on-time payments for 180 days (12 months for USDA streamline assist) 

Although there is theoretically no cap on the number of times you can refinance a mortgage, keep in mind that these waiting periods may prevent you from refinancing your house too frequently. 

How long does it take to refinance your mortgage? 

Mortgage refinancing is a lengthy process. The same tasks that went into obtaining your first mortgage apply here, including confirming your income, assessing your credit and debt, appraising the property, underwriting, and closing.  

The typical refinance gets closed after 52 days, or around a month and a half. That is around one day more than the closing of a brand-new home. 

Some lenders finish closings more quickly as a result of automated online procedures. When comparing refinance possibilities, enquire with each lender about typical closing times and anticipated closing expenses. 

Bottom line 

Refinancing can be an efficient financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, carefully examine your financial situation and then decide. 

Again, keep in mind that refinancing costs 3% to 6% of the loan’s principal. It takes years to recoup that cost with savings from a lower interest rate or a shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.  

FAQs 

  • Is refinancing worth it? 

Refinancing is well worth the effort and cost if it lowers the overall cost of the loan or releases money from your monthly budget. There are numerous ways to refinance your mortgage; there isn’t just one right approach to go about it. 

  • How long should you wait before refinancing a mortgage? 

For a standard rate-and-term refinance, you have to wait at least 210 days after the closing date of your original loan. If you want to take cash out of your home when you refinance, you’ll need to have lived there for at least a year and paid your mortgage on time for the last year. 

  • How early is too early to refinance? 

For a standard rate-and-term refinance, you’ll have to wait at least 210 days after the closing date of your original loan. If you want to take cash out when you refinance, you must have lived in the home for at least a year and paid your mortgage on time for the last 12 months. 

  • Is it better to refinance early or later? 

A refinance probably won’t make sense if you can’t lower your current mortgage rate. In this situation, paying more on your mortgage is a better way to save money on interest and get the loan paid off faster. You want to be a homeowner more quickly.  

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