When Should I Refinance My Mortgage?

Household finances change. Maybe you’ve built equity in your home, your credit score has improved, or you want to tackle a home improvement project. Any of these situations could prompt you to consider refinancing your mortgage. Mortgage refinancing involves replacing your existing mortgage with a new one, often to get a lower monthly payment, shorten your loan terms, or access cash. 

Refinancing isn’t beneficial for every homeowner. Refinancing comes with fees and closing costs. You need to weigh savings against expenses before deciding. In this post, The Focus Federal Credit Union will break down everything you need to know if you are asking yourself, “Should I refinance my mortgage?”

Reasons to Refinance Your Mortgage

Refinancing your mortgage, or “refi” for short, is the process of revising and replacing the terms of your existing home loan. You effectively seek to change the terms of your mortgage to alter your interest rate, payment schedule, or other terms. You work with a lender to secure a new mortgage to replace the original agreement. 

After you refinance, your first loan is paid off, and you begin making payments on the new loan. 

Many people refinance to secure a lower monthly payment, change their loan terms, consolidate debt, or even use cash from their home’s equity to pay bills or make renovations.  

Refinancing can help:

• Reduce Your Monthly Payment. Interest rates are regularly in flux. If rates have changed since you got your mortgage, refinancing could secure a lower interest rate. A lower interest rate helps you save on your monthly payment and increases the rate at which you build equity in your home.
• Shorten Your Loan Term. Another common reason to refinance is to shorten a loan term. Although a 30-year mortgage is most common, you can opt for a 10-, 15-, or 20-year loan. Your payments will lower the principal rather than the interest, resulting in you paying less overall.
• Extend Your Mortgage Term. Making mortgage payments may have become more challenging than you expected, or your financial situation may have changed. Lengthening the term of your mortgage can lower your monthly payments, freeing up cash to invest, build an emergency fund, pay down other debt, or spend on necessities.
• Access Your Home’s Equity. With a cash-out refinance, you take advantage of the equity in your home. Let’s say your home is worth $200,000, your mortgage balance is $165,000, and you have $35,000 worth of equity. You might seek a cash-out refinance to use the equity to pay off other debt. You can also use the money to invest in your property and make home improvements, like a new kitchen or roof. Keep in mind, you won’t be able to cash-out refinance if you don’t have enough equity in your home.
• Eliminate Mortgage Insurance Premiums. You’re likely paying private mortgage insurance (PMI) if your down payment was less than 20% when you took out your loan. This insurance costs you about $800 to $1,050 annually for every $100,000 borrowed. Your mortgage servicer must cancel your private mortgage insurance when your mortgage balance reaches 78% of your home’s value, or the mortgage hits the halfway point of the loan term. Refinancing can eliminate your PMI payments, saving you thousands.
• Convert an ARM Loan. You can refinance to switch to a different type of home loan. Perhaps you originally got an adjustable-rate mortgage (ARM). With an ARM, your interest rate starts low for a limited period. Once the initial period ends, your rate adjusts based on current market trends. You can refinance an ARM to a fixed-rate mortgage for more predictable monthly payments. It provides stability since the new rate won’t change over the life of the loan.

When Does Refinancing Make Sense?

No rules specify when it is best to refinance. It depends on your budget, homeownership plans, and financial goals. But the timing of your refinance is a vital part of the process. You’ll want to consider current interest rates, your financial health, and your credit score.

Refinancing requires a title search, an appraisal, and application fees, all of which will cost you money. The process can cost 3-6% of a loan’s principal. You’ll want to determine your break-even point after accounting for refinancing expenses. 

Consider: how long do you plan to continue living in your house? How much money will you save by refinancing? Has your financial situation changed? Answering these questions will guide your decision-making process.

Tips When Refinancing

For many homeowners, refinancing can make sense. Whether your goal is lowering monthly payments, paying off your mortgage faster, or using your home’s equity wisely, refinancing can be a smart financial move, but it takes preparation.

Consider:

• Did your credit score improve? Your credit score significantly impacts the interest rate you can secure on your mortgage. Credit scores range from 300 to 850. A good credit score makes the entire process easier and more affordable. Credit scores of 740 and higher are “very good” to “exceptional.” The minimum required score for most mortgage lenders is 620. When you bought your house, your credit score was a significant consideration for the lender. It’s also essential when you are refinancing. Substantial improvements in your credit profile can make refinancing worthwhile even when market rates haven’t changed dramatically.
• Do you have built-up equity? Equity is the difference between your home’s market value and what you owe on your loan. Equity grows every time you make a mortgage payment. And if your home’s value has gone up, you might build additional equity. If you have built up equity, it may be worth refinancing.
• How much does it cost for you to refinance? Refinancing could save you money, but it will require upfront costs. Just as you had closing costs and associated fees when you took out your current mortgage, there are refinancing costs. Expect to spend 36% of your loan principal.
• How long are you planning on staying in your home? Do you plan to stay in your home long-term? Selling shortly after refinancing means you won’t capture the savings benefits of lower rates. The timeframe will depend on the cost savings.
• Can you afford your new mortgage payment? Ensure your new monthly payment aligns with your budget. In the case of a shorter loan term, you’ll likely have a higher payment. If you’re using part of your home equity for cash and increasing your loan amount, that’s also likely to increase your payment.

Understand the Cost of Refinancing

Refinancing isn’t free. If you’re going to spend money, you’ll want to find your break-even point. Your break-even point is the point at which cost equals savings. Once you pass the break-even point, you start saving.

To determine your break-even point, calculate:

Loan Costs ÷ Monthly Savings = Months to Break Even

Say you refinance to save $150 each month on mortgage payments. You pay $4,500 in costs to get the new loan. It will take you 30 months to break even.  

Loan Costs: $4,500

Monthly Savings: $150

$4,500 ÷ $150 = 30 months to break even

As long as you plan to stay in your home for more than 30 months, you’ll save money. If you plan to move sooner, refinancing might not be the right step.

When Refinancing Might Not Be the Right Choice

Refinancing can be a practical way to save money, reduce your loan term, or achieve other financial goals. But you need to look at the whole picture, not just the rate.

It might not be worth it for you to refinance if:

• You Plan to Move. Do you already have an eye on a new home? Could your career relocate you? Refinancing may not be worth it if you’re not staying in your home long enough to recoup these costs through lower payments. This is one reason refinancing usually makes more sense earlier in your mortgage term.
• You Extend the Loan Terms. While refinancing can reduce your monthly payments, extending your mortgage term can mean paying more interest over time.
• You Risk Losing Home Equity. A cash-out refinance allows you to access your home’s equity, but also reduces the amount of equity in your home.
• Interest Rates Have Gone Up. If market interest rates have risen substantially since you initially took out your mortgage, refinancing results in higher interest rates. Your new interest rate would be higher than the current mortgage rate, which would cost you more.
• You Face a Prepayment Penalty. If your existing mortgage has a prepayment penalty, you’ll want to include it in your break-even calculation.

How To Refinance With The Focus Federal Credit Union

With market conditions constantly changing, it’s natural to wonder, “Should I refinance my mortgage?” Refinancing can take time and effort, but the savings you could receive can make it worthwhile. Your financial health plays an equally significant role. A good credit score, steady job history, and enough home equity help you get better refinancing terms.

Your Focus Federal Credit Union team will help you determine if refinancing and securing a new mortgage loan is worth it. We provide personalized guidance from local mortgage specialists who will walk you through a break-even analysis to ensure your refinancing savings cover the costs of the refi. 

Contact us to learn about our member-focused loan options.

Aiden Ferguson

Marketing Director

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