When you agree to a mortgage, sometimes things change. For example, your credit score could go up, or interest rates could drop. Maybe you have a new job with additional monthly income, or maybe you’ve lost a source of your monthly income. The good thing is that a mortgage isn’t always permanently binding. Most mortgages allow you the option to refinance.
Refinancing is when you pay off your original mortgage with a new mortgage, usually with different terms and a different APR. The goal is to improve some aspect of your mortgage. But how do you know if you should refinance your mortgage? Continue reading to learn more.
If done at the right time, you can save a lot of money over the lifetime of your mortgage by refinancing. Or, you might have another goal for refinancing. There are many varied benefits to refinancing. Here are some of the big ones.
If your financial situation has changed in a way that has made it difficult to make your monthly payments, you may benefit from refinancing. Refinancing in this situation can free up additional money in your monthly budget to help you make ends meet.
Most people’s goal in refinancing is to get a better deal, which usually comes in the form of a lower APR. The APR on mortgages fluctuates with the state of the economy. A quick Google search will return financial websites that track the state of the APR over time. You can also sign up for alerts at certain venues that will notify you when mortgage rates have dropped.
If you have been paying your mortgage (and your other lines of credit) on time each month for a sustained period, there’s a good chance that your credit score has improved significantly. This means you might be able to access a better APR.
One benefit of maintaining your monthly payments while shortening your mortgage payments — or even paying slightly more per month — is that you can shorten your mortgage. This means you’ll be paying interest for a shorter time, saving money in the long term.
Another option you have when you refinance your mortgage is to go for cash-out refinancing.
Cash-out refinancing is when you access the equity in your home by taking out a larger mortgage than the amount of money you owe. You continue to pay the mortgage as usual, and this surplus is deposited in your account. This usually extends the length of your mortgage but can be a lower-interest way to access additional cash over, say, a personal loan.
Every good thing comes at a price. This is true for refinancing as well, but if done correctly, those costs pay off.
The first thing to check when you’re considering refinancing is the potential repayment fees associated with your existing mortgage. Some mortgages will charge you a fee to pay off your mortgage early, and this is important to take into account.
Origination fees include all of the fees associated with processing the new mortgage. Often, you’ll see application fees lumped in with this cost.
This total cost is usually around 1–1.5% of the new principal.
The exact fees depend on the lender, but you can expect that you’ll need to pay some appraisal/inspection fees, as well as some fees associated with the title transfer. In addition, you might need to have a flood certificate processed for your home. Other potential costs include home insurance fees.
Overall, a good estimate is between 2% and 5% of your mortgage’s principal to refinance. However, to know exactly how much it will cost, you can inquire at the specific lender you are looking at. They should be able to present you with a summary of fees. Before closing, you’ll also receive a summary of the closing costs.
It can be hard to tell if it’s a good time to refinance.
Calculators can help you figure out exactly how long it will take you to recoup the costs associated with refinancing. They also allow you to determine how much you’ll save by refinancing.
In general, you should consider refinancing if rates are 1–2% lower than your current APR, you’re planning to stay in your home long enough to recoup the costs (usually around 3–5 years), and if you can afford the upfront costs.
You can check out our payment calculator to help you understand how your payments will change after refinancing.