Refinancing Your Mortgage: When It’s a Good Idea and When It’s a Bad Idea

All homeowners know that owning a home can be a full-time job in itself. From picking out the new tiles for the bathroom to deciding what color to paint the kitchen, there is always something that needs work. But one update that causes some confusion for both veteran and first-time homebuyers is: when is the right time to refinance your mortgage? Sure, when your roof starts leaking that’s a sign that you should probably update your roof, but do you need waterworks to know it’s time to revisit your mortgage terms?  There doesn’t have to be damage to know it’s time to refinance.

The sign it’s time to make a switch ultimately depends on your current financial situation and what goal(s) you’re trying to accomplish. Whether it’s getting better terms or accessing the equity of your home, there are some best practices you should follow when deciding to refinance. Here are the situations when you should and shouldn’t consider taking the leap.

When You Should Refinance:

If you want to lower your interest rate

This is one of the most common motivators for people to refinance. When you’re buying a home you can often get locked into a rate quickly as you rush to buy your dream home. But interest rates change over time so what might have seemed like a good rate a few years ago could be even better now!

When you’re considering refinancing for a lower rate, do the math to make sure you know what you’re getting out of the deal. Depending on how far you are into the term of your mortgage, the potential refinancing savings could be obsolete because of the closing costs on the new loan. Conversely, if you are able to reduce your rate significantly, you could be saving a large amount of money over the life of your term.

If you want to shorten the length on your loan

Another added benefit of refinancing is that you can shorten the length of your loan. While you’ll end up with a higher payment per month, you’ll decrease the amount you’re paying in interest — meaning you’re one step closer to paying down your loan in full. If you’re trying to decrease your debt quickly this can be a great option for you. However, remember that you can also make larger payments on your current loan to achieve the same effect, so you’ll need to take a close look at your finances and make sure that getting locked in with the larger payments is sustainable for you.

If you want to access the equity (aka ca$h)

Known as a “cash-out refinance” this option can get you access to your home’s equity that has built up over time. When interest rates are low, this is a great option for people whose homes have increased in value over time and have most of their money tied up in the home. Should you choose this route, it will give you access to the equity you have built up. A word of caution with this type of refinance — be sure you use these assets to pay down your other debts or reinvest in your current home. Utilizing this cash for other types of spending can end up getting you further in debt, which you certainly want to avoid.

When You Should Not Refinance:

If you don’t plan on staying in the home long term

Not only does moving cost a lot of money, but it will also mean you’re not in the house long enough to capitalize on the benefits of your new improved terms. You’ll also still be required to pay any associated costs that you’ve accrued with your new loan. So be sure you plan to stay at least 5 years in your home post-refinance to not put yourself in a worse place financially.

If you thought refinancing was free

Spoiler alert: it definitely is not! Depending on your loan it can cost anywhere from $1,500 to upwards of $5,000 to refinance. This is because you have to pay closing costs similar to when you first bought your home. This can include appraisal fees, loan origination fees, and other 3rd party expenses.

Now, what about no closing cost refinances? These occur when the lender covers the costs of your refinance, but nothing in life is ever really free. To cover the cost of a “free” refinance your rates will tend to be higher than other options available at the time.

If you’re not in the right financial position to refinance

This one is key! Refinancing is a big step so you’ll want to make sure you’re in the right financial place before you make this swap. Do an assessment of your overall financial health to see where you stand. Start by checking your credit score. This is a key number that lenders use to determine your eligibility for rates — remember just because you see a rate advertised online does not automatically mean you qualify for it. Pro tip: you can easily check your credit score for free with Turbo.

Also, consider your recent job moves. If you’re thinking about switching jobs it might not be the right time to take on a new loan payment should your salary change. Finally, calculate your potential new payments and make sure it’s a comfortable amount you can pay each month.

Ultimately there are a lot of benefits to refinancing your mortgage but they’re only great if you’re ready to make the upgrade.