5 Questions to Ask Before Refinancing Your Mortgage

You've probably heard the phrase "mortgage refinance" before.

Maybe you've even received offers about it in the mail. But if you're like many homeowners, you may be confused about whether refinancing applies to you — or if it's worth the time and effort.
 

What is a mortgage refinance?

A mortgage refinance replaces your existing home loan with a new one. Homeowners refinance for a variety of reasons, including securing a lower interest rate, changing their loan term, tapping into home equity, and changing their loan type from an adjustable-rate to a fixed-rate.

The truth is, refinancing isn't automatically the right move for every homeowner. The right call depends on your finances and what you hope to accomplish in the years ahead.

Before you start exploring a mortgage refinance, here are five questions worth asking yourself.
 

1. How long do you plan to stay in your home?

One of the most important questions to ask before refinancing is how long you expect to stay in your current home. Refinancing involves upfront costs, sometimes totaling thousands of dollars. If you're planning to move in the near future, you may not recoup your money. On the other hand, the longer you expect to stay in your home, the more likely you’ll realize the long-term savings from refinancing.
 

Ask yourself:

• Do I see myself staying in this home for the next several years?
• Will I possibly need to relocate for work or to be closer to family?
• Could my housing needs change in the near term due to a growing family or a need to downsize?

2. Does the current rate gap work in your benefit?

Depending on when you purchased your home, interest rates may have been very different than they are today.

For a mortgage refinance to make financial sense, two things must be true:

1. The current interest rate must be lower than the interest rate on your mortgage.
2. The gap between the current rate and your mortgage interest rate must be wide enough to reduce your monthly payment such that the savings outweigh the costs of refinancing.

You can use an interest savings calculator to determine how much the current rate could lower your monthly payment, but it also depends on how long you plan to stay in your home.

Which leads to the next question…
 

3. Have you calculated your break-even point?

Many homeowners are so excited at the prospect of potential monthly savings that they overlook an important part of the equation: the break-even point.

Your break-even point is the amount of time it takes for savings from refinancing to offset the costs associated with opening a new loan. That's why your timeline matters. If you expect to move before reaching your break-even point, refinancing may not make financial sense.

4. Do you understand the costs involved with refinancing?

Refinancing involves more than simply replacing one loan with a new one. There are also closing costs and other expenses associated with the refinance process. These can cost between 2% to 6% of your loan amount and cover things like origination fees, appraisal fees, title searches, and taxes. However, there are sometimes more options for paying these upfront costs other than writing a check at closing.

Talk with a mortgage lender to find out if you can:

• Add closing costs to the new principal balance on your refinanced loan. This is helpful if you lack the cash to pay upfront, but you will pay interest on this extra amount over the life of the new loan.

• Choose a “no closing cost” refinance. This means the lender pays your closing costs in exchange for a slightly higher interest rate on your new loan.

5. What major life changes are on the horizon?

As we’ve mentioned many times already, your plans for the future can determine whether or not a home loan refinance makes sense right now.
 

Major life changes that need to be factored into any refinance decision include:

• Fast-approaching your retirement
• Growing your family or needing to downsize
• Paying for college education
• Launching a new business or changing careers
• Anticipating a future move for any reason

Before making a decision, think about what your life may look like in the next few years. The right mortgage should fit your plans for the future, not just your immediate situation.
 

So… When Should You Refinance?

The answer is as unique as your financial situation. For some homeowners, refinancing may offer new ways to help them reach their financial goals. For others, staying with their current mortgage may make more sense.

If you're exploring a mortgage refinance, taking the time to ask yourself these five questions can make your decision easier.

In addition, our Homebuyer Budget & Timeline Tool can help you better understand how different mortgage refinance options may affect your short- and long-term goals with calculations based on your real life.
 

Ready to Give Refinancing a Closer Look?

If you want help thinking through your timeline, evaluating the costs, factoring in recent or upcoming financial changes, and discussing what's ahead, our mortgage loan originators can help. We can walk you through your options and answer your questions. Together, we’ll run all the numbers, discuss your goals, and help you determine whether it's a smart time to refinance.