Refinance or Not? How to Know.

When mortgage interest rates are low, is it always a good idea to refinance? Not necessarily. While many homeowners flock to refinance their mortgages at a lower interest rate that does not always mean that it is always the right choice. There are many reasons why people refinance their mortgage, some make more financial sense than others.

Refinance to pay off the mortgage faster. Smart.

Use refinance savings to boost retirement contributions or allow more room in your budget. Also smart.

Cash out home equity to go on a spending spree. Not so much.

There are a few things to consider before jumping on the refi band wagon, let’s take a moment to consider them and decide if a refinance makes sense for you.

There are two main reasons to refinance; reduce your monthly payment or save on the overall interest paid over the life of your mortgage. The best (read: easiest and most accurate) way to determine the potential savings from refinancing is to have a mortgage banker help run scenarios that will show your new monthly payment and possible savings over time. They can also give you an idea of the cost.

Keep in mind: refinancing does cost money, often thousands of dollars in closing costs, appraisal, and origination fees. There is a point where the monies saved from refinancing balances out the initial cost; this is referred to as the break-even point. Consider how much longer you plan to be in your current home as it will not make sense to refinance your mortgage if you plan to move before reaching that point. Not sure what your break-even point is? A mortgage banker can help you calculate this.

Should you decide that you would like to move forward with a refinance, you and your home will go through the underwriting process for approval, just as you did the first time you applied for a mortgage. You will need to meet income and credit qualifications. Plus, the amount of equity you have in your home, as well as, your home’s market value will be a factor. Your mortgage lender will need to see that you earn enough to make the mortgage payment, you are credit worthy, and that the home value is in line with the loan amount.

Deciding to refinance your mortgage is no small task and will take some time to figure out if it is the right move for you but could be well worth the effort, possibly saving you thousands of dollars over the life of your loan. If you are looking for some help in crunching numbers in different loan scenarios, we are here for you. After all, that is what we do every day—get in touch with a mortgage banker in your area or send us a message on our website chat. However, if you aren’t quite ready to talk you can find more information on how refinances work and other helpful tips in our refinancing guide.