Mortgage Refinancing Guide

Mortgage rates have dropped.

A good rule of thumb is that it can make sense to refinance if rates are lower than when you got your original loan.

Adjustable rates are on the rise.

If the rate on your current adjustable-rate loan is climbing past your comfort zone, it could make sense to switch to a new, fixed-rate mortgage.

Your house has increased in value and you want to tap into your equity.

Live in a hot real estate market? Your house could be worth a lot more than when you bought it. If you need cash for a big home improvement or other expense, a refinance could be an affordable way to get access to the value in your home.

You want to reduce your monthly payment.

Have you had big changes in your life that mean it’s a stretch to afford your current payment? A refinance could give you some breathing room.

You want to pay your loan off faster.

Are you in a better financial position than when you took out the loan? Cutting the length of your loan and making a bigger monthly payment could decrease the amount of interest you’ll pay over the life of your mortgage.

Can you afford the costs that go with refinancing?

There can be a number of fees associated with a refinance. For instance, you might need to pay for an appraisal fee and title insurance. If you can’t afford to pay these upfront, you can build them into the loan, but that will bump up your monthly payment and/or the length of your loan.

How long do you plan to stay in your house?

It could take a while – from months to years – to hit the breakeven point on refinancing fees, so it’s important to do the math. If you’re expecting to move in the near future, it’s probably not the right time to refinance.

How good is your credit?

Your credit score can impact your interest rate as well as the amount of closing costs you will have to pay. If your credit is a bit shaky, you may want to start by focusing on improving your score before refinancing.

Will you actually pay more in interest?

If you’re having a hard time making your monthly mortgage payment, it can be tempting to hit “reset”, however you may end up paying more over the term of your loan. For instance, to take your current 30-year mortgage you have been making payments to for three years and turn it into another 30-year mortgage could result in paying more in total interest over the life of your loan, even if your new interest rate is lower than your previous one.

Use this to figure out how much you’ll really pay in interest.

Are you using the refinance to consolidate debt?

Think about which debts you’re rolling into your mortgage: are they short-term loans or long-term ones? For instance, do you really want to be paying off your car loan for 15 or 30 years? Even if the interest rate is lower, you’ll still pay more in interest over the life of your loan.