Should You Refinance Your Mortgage?
Reasons Why You Should (or Shouldn’t) Refinance Your Home
Many homeowners wonder, "Should I refinance my mortgage?"—especially when interest rates are low. The decision depends on various factors, including the interest rate on your current mortgage, how long you plan to stay in your home, how many years remain on your loan, and your overall financial situation.
Check out our list of refinancing questions below. Answering these questions can help you determine if refinancing your mortgage is the right choice for you. Keep in mind that refinancing may increase the total finance charges over the life of the loan.
Are Today’s Rates Low Compared to Your Current Rate?
When considering refinancing, the key question is not whether today’s rates are low compared to historical rates but whether they are lower than your current mortgage rate.
Financial advisors offer various rules of thumb regarding how much lower rates should be before considering a refinance. We recommend using our home refinance calculator, which can show you how changes in your interest rate and other mortgage terms might affect your monthly payments and potential savings in interest over the life of the loan.
How Long Do You Plan to Keep Your Home?
Refinancing may not be a sound choice if you plan to sell your home soon. This is because refinancing involves upfront closing costs, which you either pay in cash or add to your loan amount. The benefits of refinancing typically accrue over time, making it necessary to "break even" on your closing costs. For instance, if you save $100 per month by refinancing and incur $1,200 in closing costs, it will take you twelve months to break even before you start saving.
How Many Years Are Left on Your Mortgage?
The remaining term on your current mortgage is another crucial factor. If you have many years left to pay on your mortgage, refinancing may be financially advantageous. Conversely, if you're nearing the end of your mortgage term, refinancing might not be worth it. This is because mortgages are structured to pay most of the interest upfront, meaning you might not save significantly by refinancing late in the loan term, especially when accounting for closing costs.
If you’re close to paying off your mortgage, you may want to avoid extending your loan term through refinancing. Many lenders may not offer short-term mortgages, potentially leading to higher interest costs over time. If you have less than 15 years left on your current mortgage, refinancing might lead to increased total interest payments.
If you are currently a
Mortgage Mac customer, we can often assist you in refinancing while maintaining your loan term. Call us to learn how we can help!
Are You Paying Mortgage Insurance?
If you have a conventional loan, refinancing may allow you to eliminate private mortgage insurance (PMI), provided you have at least 20% equity in your home. It's important to note that you don't necessarily need to refinance to remove PMI; you can request your lender to remove it once you meet the necessary criteria.
For FHA loans, different rules apply regarding mortgage insurance premiums (MIP). If you initially financed your home with an FHA loan, you may need to refinance into a different loan type to eliminate MIP payments. Learn more about ways to stop paying mortgage insurance.
Do You Have Good Credit?
Having good credit can enhance your chances of getting approved for a refinance. A strong credit score often leads to better interest rates. Lenders may offer you a lower rate if your credit score is high, while a lower score might result in higher rates than those you see advertised.
Should You Refinance an FHA Loan?
FHA loans also offer a streamline program, which can simplify the refinancing process when it makes sense for you. FHA streamline refinances generally require less paperwork and provide more flexible credit terms compared to conventional loans. However, you will still need to pay new mortgage insurance premiums, which include an upfront premium payable at closing (or added to your loan amount) and monthly premiums included in your mortgage payment.
Disclaimer: Mortgage Mac Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Please consult a financial advisor before making significant personal financial decisions.