When to Refinance Your Mortgage: Is Now a Good Time?

Choosing when and how to refinance your mortgage requires not only keeping a close eye on rates but also a holistic approach to your finances.

There are a variety of reasons people choose to refinance, including reducing their monthly payment, shortening their loan term or tapping their home equity to free up some cash.

Below are some of the top issues around refinancing that you may wish to discuss with your lender, financial advisor and tax expert.

 

How Does Refinancing Work?

Refinancing works by replacing your current mortgage with a new mortgage that has new terms. The new terms may include a new interest rate, length of the loan and amount borrowed. When you refinance, you pay off your existing loan with the new loan and you begin making payments based on the new terms.

 

At What Point Is Refinancing Worth It?

Deciding when to refinance your mortgage can be tricky due to the timing of interest rates. This is especially true in a volatile economy. It can be helpful to learn how interest rates are calculated in our article about the topic.

Refinancing may be worth it if you can lower your monthly payments or shorten the length of your loan. However, whether you should refinance depends on your financial situation. Be certain to speak with your mortgage provider and a wealth planner to help decide what options are right for you.

Before refinancing, calculate whether the move will make sense for you financially. Start by reviewing the changes in refinance rates to see if the new rate will actually help you save money, and be sure to include any closing costs or other costs involved in refinancing. Calculate the break-even point, or the point at which the cost of refinancing is outweighed by the savings you will realize from your new loan terms.

 

Common Reasons to Refinance Your Mortgage

Your life stage and your homeownership plans will likely influence your decision about whether to refinance. For example, if you plan to sell your home soon, a refinance may not be worthwhile because of the cost of refinancing. If you plan to own your property for another decade or longer, refinancing may make more sense.

However, if you're preparing for other big changes, such as sending your children to college in a couple of years, you may want to use a refinance as a financial planning tool. With lower mortgage payments, you might be able to improve your cash flow.

It’s a good idea to discuss with your financial advisor your reasons for refinancing and how to best take advantage of lower rates to meet your goals.

For example, a refinance may help you prepare for retirement. If you are nearing retirement age, you may want to pay off your mortgage or reduce the size of your payments — two things a refinance might be able to help you with.

You may want to consider refinancing your mortgage for some of the following reasons:

Eliminating Private Mortgage Insurance (PMI)

Federal law requires mortgage lenders to automatically remove PMI from a mortgage when a person has paid off 78% of a home's purchase price, or when the loan term is halfway complete, whichever comes first.

However, it can be possible to get rid of PMI earlier than the rules mentions above.

Some people refinance so they can stop paying PMI. If the value of your home has increased since you purchased it, you may now have enough equity in the home to refinance it without PMI, which usually increases the amount of your monthly mortgage payment.

Though knocking the cost of PMI off a mortgage payment might seem appealing, the price of PMI might not be enough to be the sole reason of refinancing a mortgage. But it can be a welcome additional benefit when refinancing for other reasons, such as securing a lower interest rate.

Lowering Interest Rates

During a lowering rate environment, you may want to refinance your mortgage to secure a lower interest rate for it. By refinancing to take advantage of lower interest rates, you can reduce the amount of your monthly payments or shorten the length of your loan without increasing your monthly payment amount. However, you may wind up paying more in interest over the life of the loan, as a refinance may extend the loan's maturity date.

Shortening Mortgage Term

While 30-year fixed rate loans remain the most popular mortgage, refinancing borrowers might choose a 20-, 15- or 10-year term that enables them to pay off their loan faster and reduce the overall interest paid. Click the following link for important disclosure information: City National mortgages

You can compare loan payments and interest payments with your lender to decide the term that matches your financial goals and situation.

When you refinance, the amortization, or the process of paying off a loan over time, on your mortgage restarts. If you’ve been paying down a 30-year mortgage for some time, you may want to refinance with a 15-year loan rather than starting a new 30-year mortgage.

The rates on a shorter loan term are typically lower and you may be able to accelerate your payoff date with a payment amount that is similar to your current amount.

Switching to ARM or Fixed Rate

Refinancing can give you an opportunity to switch the rate type of your mortgage. For example, you may want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan.

Tapping Home Equity

A cash-out refinance allows you to tap into your home equity. Based on the amount of equity, or outright ownership, you have in your home, you may be able to refinance the mortgage and take out some of the equity as cash.

Some common reasons to tap into equity include:

• Wedding or other life events
• Remodeling or home improvement
• College tuition costs
• Consolidating high-interest debt

Keep in mind that a cash-out refinance might not be the best option for everyone. While the process does provide borrowers with access to more cash, it also increases their debt burden. In other words, a cash-out refinance means borrowers are taking out a larger loan amount, increasing the amount of debt they're in.

A home equity line of credit (HELOC) is another way to access home equity, particularly for homeowners who don't need cash immediately.  With a HELOC, there are no payments until you actually use the money, so it can function as a reserve to allow you to access cash you may need in the future.

 

When to Consider Holding Off on Refinancing

While refinancing can be a smart financial move for some homeowners, it’s not ideal for every situation.

You may want to hold off on refinancing if:

• You plan to sell the home within the next few years. Calculate your break-even point to see if you’ll be staying long enough to recoup the costs of refinancing.
• You’re already close to paying off your mortgage.
• The cost of taking out a loan will cost you more in the long run when compared to your current loan.
• You can't afford closing costs.
• Your credit score has lowered, making it less likely to get favorable terms on a new loan.

 

The Cost of Refinancing a Home

Closing costs vary by location and average between 2 % and 5 % of the refinanced loan.

Take time to figure out how long it will take to recoup the closing costs of a refinance. If you will break even within 12 to 20 months, then it might make sense to refinance.

Some lenders offer to pay all closing costs, but that usually means borrowers will pay a slightly higher interest rate for the entire loan term. For example, if a lender offers a borrower a 5% interest rate for their refinanced loan, that buyer might be willing to cover closing if the borrower accepts a rate of 5.25%.

Deciding which route is best for your situation will require doing some math and comparing the various options.

 

Qualifying for a Mortgage Refinance

Getting approved for a refinance depends on several factors, including the borrower's ability to repay the loan, the appraised value of the property and the final loan amount. However, requirements can differ from lender to lender so it's important to understand the requirements of yours.

Homeowners should consult with their financial advisor before making major changes to their financial situation. If you need to discuss your wealth plan with an advisor and wish to find one? Get in touch with a City National advisor today.