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Refinancing your home mortgage

If you’ve been thinking about refinancing, it’s likely that you have some questions. It’s natural to wonder things such as how soon can you refinance a mortgage or when should you refinance a mortgage?

 

Oftentimes, homeowners can benefit from refinancing, but it’s important that you understand all the ins and outs of the refinancing process. First off, it’s essential to note that refinancing isn’t free, and under some circumstances, it may even be a bad idea. 

 

Keep reading to learn everything you need to know about refinancing, including when to refinance a home vs. when you might want to hold off a bit. 

 

What Does Refinancing Your Mortgage Mean?

Refinancing means trading in your current mortgage for a new home loan. There are a number of options available to homeowners interested in mortgage refinancing, each with their own benefits and drawbacks. 

 

For example, a cash-out refinance allows a borrower to take out a larger loan and pocket the difference, while a rate and term refinance lets borrowers change the terms and interest rates of their mortgage. 

 

When You Should Refinance Your Home

When can you refinance a mortgage, and what makes refinancing a good choice? People choose to refinance for many reasons, but certain circumstances can make refinancing worthwhile.

 

Rates Have Decreased

Interest rates for mortgages typically fluctuate over time. If current mortgage rates have fallen below the rate on your current loan, refinancing could lead to huge savings. So, when should you refinance your home because of a rate drop? It’s worth considering refinancing if interest rates have dropped by at least 1%. 

 

Improved Credit

Credit scores have a direct impact on mortgage interest rates. If your credit score has gone up significantly since you first obtained your mortgage, you might qualify for a loan with a lower interest rate, which could potentially save you thousands of dollars over the life of your loan. It might make sense to refinance if you’ve seen substantial improvement in your credit rating.

 

Shorten Your Loan Terms

Refinancing can be a way to lower your interest rates and monthly payments, but it could also help you to pay off your mortgage sooner. Shortening your loan terms will allow you to pay less interest in total. Just keep in mind that shortening your term will likely lead to higher monthly mortgage payments.

 

Switching from an ARM

While an adjustable rate mortgage (commonly referred to as an ARM) can typically help you secure a lower interest rate initially, your interest rate can go up (sometimes by a staggering amount) after the initial fixed period for the loan has passed. Refinancing might allow you to switch from an ARM to a fixed-rate mortgage. If you have concerns about rising interest rates, you may want to look into refinancing. 

 

Home Equity Increased

If your home has increased in value, refinancing can be a way to convert the equity you’ve built into cash. A cash-out refinance is worth considering if you’re in need of funds, especially if you can also lower your interest rate. If refinancing will cause your interest rate to increase, however, it may make more sense to look at other types of loans.

 

Advantages of Refinancing Your Home

Don’t worry if you’re still wondering: When should I refinance? or Why refinance a mortgage?” You can answer many of your questions by looking at the benefits refinancing might offer. 

 

  • It can save money: Refinancing at the right time could lead to a reduced interest rate and lower your monthly mortgage payments. It can also be an opportunity to lock in a fixed rate loan while interest rates are low.
  • You can pay off debt sooner: If your income has increased, and you can afford a larger monthly payment, refinancing can allow you to shorten the terms of your loan. Paying off your loan in less time means that you’ll spend less on interest over the life of the loan. Sometimes, this can amount to several thousands of dollars in savings. 
  • It lets you access home equity: Refinancing is one of several ways to take advantage of any equity you might have built (which means the value of your home is worth more than what you owe on it). By refinancing, you can access cash that you can put towards home improvement, pay off debt, or use for any number of other expenses. 
  • You can stop paying private mortgage insurance (PMI): When a down payment is less than 20% of the value of a home, borrowers are usually required to carry private mortgage insurance (PMI). A good rule of thumb to keep in mind if you’re wondering when should you refinance a mortgage is this: if your loan-to-value amount has fallen below 80%, refinancing can allow you to remove PMI.

 

When You Shouldn’t Refinance Your Home

If you want to learn how to know when to refinance your mortgage, you’ll need to know when refinancing doesn’t make sense. Yes, as we’ve shown, refinancing can be favorable under certain circumstances, but the benefits don’t always outweigh the costs.

 

Prepayment Penalties

Your current mortgage may have a prepayment penalty, which means you’ll be hit with a penalty fee if you pay off your mortgage early. It might make sense to pay the fee if you qualify for a much lower interest rate. However, refinancing won’t always save you enough to make the penalty fee worthwhile. 

 

Existing HELOC

Before you start thinking about when to refinance your home, you’ll want to make sure refinancing is even an option. If you have a home equity loan or line of credit, you may need permission from your lender to refinance. Note that you might not be eligible to refinance until after that loan is paid off. 

 

Mortgage Almost Paid off

In the early stages of your mortgage term, refinancing can have many financial benefits. However, if you’re close to paying off your home loan, it’s likely that refinancing will cost you more than it saves. When you refinance, you take out a new home loan, which means you might be sending yourself back to square one.

 

How to Refinance Your Home with Island Federal

If you have questions about when to refinance a mortgage, or if you’re trying to decide if refinancing is right for you, Island Federal is here to help. We’d be happy to answer your questions and talk with you about your mortgage refinance options. Contact us today by phone or email to learn more.