Is Now a Good Time to Refinance Your Mortgage?

Couple deciding whether to refinance their home
When mortgage rates drop, it’s typical for homeowners to flock to their bank or mortgage lender to discuss refinancing their home. While refinancing has certainly been popular within the last year, it’s not always the right decision. In this article, we will explore several factors to consider before refinancing your home, the benefits of doing so, and when refinancing is the smartest financial move.

How does refinancing work?

When you refinance, you are replacing your existing mortgage with a new one. There are an array of options available to you, but finding the right loan depends on your unique financial goals. Perhaps you’re looking to convert an adjustable-rate mortgage to a fixed-rate loan that has a steady, predictable monthly payment, or you could be looking to save thousands of dollars in interest charges by shortening the term of your loan from 30 years to 15 years.

What is a cash-out mortgage refinance?

Some homeowners are looking to borrow cash against their home to pay down high-interest credit card debt or pay for home renovations. This is called a cash-out refinance. If you’ve built equity in your home, this may be a great solution for you. A mortgage refinance is typically offered at a lower interest rate than other personal loans.

What costs are associated with refinancing?

The costs associated with refinancing your home are almost the same as with a purchase, except refinance costs can be incorporated into the loan with the exception of the appraisal fee.

Standard refinance costs include title fees, credit report, appraisal, setting up a new escrow account if escrowing for taxes and insurance, taxes on the mortgage as applicable by the county and state, recording fees, and any set fees to the bank or lender.

Before beginning the formal application process, ask your mortgage banker to provide a written estimate of costs so you can see what the loan will look like in terms of loan amount, rate, payment, and all the extra costs associated with the refinance. This allows you to make an informed decision before you invest too much time or money in the process.

When is it a good idea to refinance my home?

Generally, refinancing your home is a good financial decision if it will save you money, help build equity in your home, and allow you to pay off your mortgage faster. A mortgage banker can help determine if a refinance will benefit you by doing a net benefit analysis. Just because rates are low does not always mean a refinance is the best option.

If someone is refinancing a 30-year loan to get a shorter term, there is generally a benefit. However, refinancing from a 30-year to another 30-year can only benefit the homeowner if the new rate is low enough to justify the costs associated with refinancing. Consider refinancing your home if you can lower your interest rate by one to two percent – this can lower your monthly payment substantially.

What are the benefits of refinancing?

The most common reason homeowners choose to refinance is to get a lower interest rate on their mortgage. A lower rate will typically give you lower monthly payments. You may end up paying less for your home overall, freeing up extra cash in your budget each month that you can put towards savings goals, a vehicle, or even “fun money.”

Another advantage to refinancing is the potential to clear your mortgage debt in less time. For example, if you are locked into a 30-year loan, refinancing to a 15-year mortgage means you’ll own your home debt-free that much sooner. In addition to paying your loan off faster, this allows you to build equity in your home, making you a candidate for future lending options like a home equity line of credit (HELOC). The disadvantage of shortening your loan term is your monthly payment is going to be higher, so make sure you are prepared to adjust your budget for this.

Refinancing your home also gives the homeowner the potential to eliminate private mortgage insurance (PMI) from the monthly payment, which could save you thousands each year. It’s important to note this is only an option if your new mortgage loan is for 80 percent or less of your home’s current value.

What is the impact to my credit score?

When it comes to any sort of lending - obtaining a new credit card, opening a new loan account, etc. – dings to your credit are inevitable. Refinancing your mortgage is no different.

However, the impact to your credit score is minimal. According to FICO, these hits are often “less than five points.” There are two reasons refinancing affects your credit score: the length of credit history, and soft or hard inquiries for new credit.

Don’t let the fear of a temporary impact on your credit keep you from talking to a mortgage banker about refinancing. The savings you’re likely to reap should far outweigh a few points deducted from your credit score.

How do I know if refinancing is worth it?

Refinancing your mortgage loan can take a significant amount of time and effort – after all, you’re replacing your old loan with a new one. It’s important to consider whether the money you will save will make up for this extra effort. Use our home refinancing calculator to estimate what your new mortgage could look like, should you decide to go through with the refinancing process.

Your credit score will be a significant factor in the interest rate you are offered. Before filling out the loan application, you should know where your credit score stands. If it needs a little bit of work, you may want to work on building up your credit score before you consider a refinance.

We have experienced, local SouthState mortgage bankers who will spend time with you to talk about your financial goals and refinancing. Our bankers will analyze the numbers to let you know if refinancing will benefit you, or if you are best to wait until a future date.

About the Author

Vanessa Coniglio, NMLS #922042, is a SouthState mortgage banker based in Ft. Pierce, Florida. She has worked for numerous mortgage companies as well as a couple of large banks and she specializes in construction loans, helping first-time homebuyers, and loans for condominiums.
Vanessa Coniglio, Mortgage Banker

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