Should You Refinance Your Mortgage?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

Are you considering a mortgage refinance but unsure if it makes financial sense? Whether you’re looking to get a more affordable monthly payment, lower rate, change the loan term or pull cash from your equity, there are factors to consider before applying. This guide explores different scenarios to help you determine when a mortgage refinance makes the most sense and when it’s not the best option.

How Much Can You Get by Refinancing? 

Some homeowners choose to refinance their mortgages to access cash. Through a cash-out refinance, you may be able to borrow up to 85 percent of your home’s equity. 

To illustrate how it works, assume your home is worth $450,000 and you owe $250,000 on the mortgage. You could potentially pull out $132,500 in cash ($450,000 * .85 – $250,000), and your old loan would be replaced with a new one for $382,500 ($250,000 + $132,500). This is equivalent to the existing balance plus the amount of cash you pull out). Going forward, you’d make payments on the new loan until it’s paid in full. 

How Do You Know if It is Worth It to Refinance Your Mortgage?

Before deciding if refinancing your mortgage is worthwhile, evaluate the reasons for wanting to move forward. Also, run the numbers to determine if it makes sense and gets you closer to achieving your financial goals.

When Should You Refinance Your Mortgage?

Here are some instances when refinancing your mortgage could be good for your financial situation.

If You Want Your Interest Rate Lowered 

If market conditions have caused a reduction in average market rates, you can take advantage by refinancing your home loan. A slight decrease could equate to thousands of dollars in cost savings. 

To illustrate, assume you have an outstanding mortgage balance of $140,000 with a 5.5 percent interest rate and 20 years remaining on the loan term. You apply to refinance, and the lender offers you a 4.75 percent interest rate with a 20-year loan term. You’ll save $70,868.86 in interest over the loan term. 

If You Want to Change Your Loan Terms

An extended term gives you more time to repay the loan, which means your monthly mortgage payment will also be lower. However, it also means you’ll likely pay more in interest as the lender will have more time to collect it from you. Furthermore, the lender may offer you a higher interest rate if you opt for a lengthier loan term. 

But if you want to shorten your loan term to pay off the mortgage faster, you could pay more each month. The upside is you could get a lower interest rate and enjoy reduced borrowing costs over the life of the loan. 

If Your Credit Score Has Increased

The most competitive interest rates on home loans are generally reserved for borrowers with good or excellent credit health. A high score means you’ve managed your past and current debt obligations responsibly and are less likely to default on your loan payments. In turn, the lender will reward you for your efforts by offering a lower interest rate. 

If your credit score wasn’t on the higher end when you initially applied for a mortgage, there’s a chance you didn’t qualify for the best rate available. However, an increase means you could potentially qualify for a better rate, particularly if your score is higher than it was when you took out your current mortgage and average interest rates are lower or around what they were. 

If You Want to Invest the Money

You can also pull funds from your home equity through a cash-out refinance to expand your investment portfolio of stocks, bonds or other assets. Another way to invest the money is by making much-needed home repairs or upgrades to increase its value, leading to a higher profit margin if you decide to sell the property soon. 

If You Want to Get Rid of PMI 

If you have a conventional mortgage, it’s not necessary to refinance to eliminate private mortgage insurance (PMI). Instead, you can reach out to your lender to request that it be removed once there’s at least 20 percent in equity in your home. 

FHA loans are another story – they come with mortgage insurance premiums (MIP) that remain intact for the life of the loan unless you refinance into a conventional mortgage. (An exception to the rule applies if you made a down payment of 10 percent or higher. In this case, the MIP will fall off after 11 years of mortgage payments). 

When Shouldn’t You Refinance Your Mortgage?

Unfortunately, there are also circumstances when refinancing may not be the best option. 

If You’re Moving Out

Relocating can be an exciting time, especially if it’s for a good reason. However, it also means that you may want to hold off on refinancing, or you could lose money on the deal. 

If You Have Other Home Equity Loans

Some lenders will deny your mortgage refinance application if you have outstanding home equity loans, home equity lines of credit (HELOC) or other claims against the property. So, inquire before refinancing to determine if you’ll need to pay the balance(s) in full to get approved. 

If You Just Want to Splurge on Purchases

Will refinancing put you in a better financial position? If not, or if you’re simply looking for extra funds to splurge on unnecessary purchases, it’s best to hold off. 

If You’ve Almost Paid Off Your Mortgage

A quick glance at your mortgage amortization schedule will reveal that a bulk of your monthly payment at the beginning of the loan term is applied to interest. Once you’ve paid for some time, though, more is applied to the principal, resulting in an increased amount of equity. Unfortunately, it also means refinancing could reset the loan term, and the cost savings wouldn’t be as significant as they would have been if you’d refinanced much earlier in the loan term. 

Is Refinancing Your Mortgage Right for You?

No matter the reasons why people choose to refinance their homes, you need to consider your circumstances to understand if refinancing is right for you.

Check Your Finances

Do the benefits of refinancing outweigh the costs? Use a refinance calculator to run the numbers and determine if swapping out your current mortgage for a new one makes financial sense. 

Understand What Refinancing Means for You 

Are you familiar with how refinancing works? Then, be sure to get familiar with the process and explore all your options, along with the benefits and drawbacks of each, to determine if you should apply. 

Time It Properly

Is the time right for a refinance, or should you hold off? Maybe rates are on the higher end, or you want to improve your credit score or save up a bit more for closing costs before you refinance. Either way, be sure to time the transaction properly to maximize the benefits. 

Check Your Refinance Rate Without a Credit Check

You’ve run the numbers and determined that refinancing is a good move for your financial health. Now, it’s time to explore what lenders have to offer and shop around for the best deal.

Start by checking out Zero Mortgage, a direct lender that prides itself on providing an exceptional, hassle-free lending experience. There are no application, processing, underwriting or lender fees. Plus, you can check your rate without impacting your credit score. 

To date, Zero Mortgage has originated $3b in loans, served more than 12,000 happy homeowners and is standing by waiting to provide you with top-notch service. Visit the website to learn more about its refinance mortgage loans, answer a few simple questions and get your rate quote in less than 15 minutes.

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