When should I refinance my mortgage? 4 factors to consider

• How much home equity do you have?
• What are your mortgage goals?
• What are the current interest rates?
• How long has it been since you purchased your home?

How much home equity do you have?

One of the biggest advantages of owning a home over renting is the ability to build equity. Home equity is what your home is worth in the current market, less the amount owed on any mortgage. In other words, it’s the percentage of your home that you own. Unlike monthly rent, every payment you make on your mortgage gets you closer to paying it off entirely, all while your home equity keeps accumulating. 

If your home equity is high, you could leverage it for better rates, cash out, or a new loan type when you refinance. So, how much equity is a lot of equity? As in all things mortgage, it depends on your unique financial situation. In general, you’ll want to aim for at least 20% equity in your home before considering a refinance.

What are your mortgage goals?

When most people think of refinancing, the first thing that comes to mind is a rate and term refinance. As the name implies, a rate and term refinance allows you to get a new rate and/or term on your mortgage. You may also be able to refinance to a different loan type that better meets your needs. It’s not the only option out there, though. 

A refinance can also be used to fund home renovations, leverage your home equity for cash, and more. The goal you have in mind can help you determine if it’s the right time to refinance. For example, if your goal is lower rates and rates are higher than usual, it might be better to wait until rates drop. If your goal is to boost equity with renovations, seasonality might be important to factor into your decision as well.

Top 5 reasons to refi

1. Lower your interest rate to get a lower monthly mortgage payment.
2. Get cash out of your home equity to get funds for home reno, remodeling, and more.
3. Consolidate debt* to make fewer loan payments on a monthly basis.
4. Pay the same amount each month to gain financial stability.
5. Pay off your mortgage faster to save on interest and gain complete ownership.

*Using your home equity to pay off debts or make other purchases does not eliminate the debt or the cost of the purchases, but rather increases the loan amount of your mortgage to be paid according to your new mortgage terms.

What are the current interest rates?

Speaking of rates, let’s discuss the elephant in the room. While rates aren’t the only factor to consider when asking, “When should I refinance my mortgage?” they’re undeniably an important one. No matter your mortgage goals, rates will impact your ability to reach them. 

Yes, lower rates are typically more desirable. But unfortunately, when it comes to average market rates, there’s only so much you can control. It’s up to you to decide if it’s worth it to hold off on refinancing until average rates are lower. And there’s always the risk that if you wait for rates to get lower, they may actually go up instead. 

It’s not an easy decision, but remember that your best rates don’t only depend on the market. Factors like your credit score, home equity, and debt-to-income ratio (DTI) can also help you qualify for better rates regardless of the market. So, if your finances are where you want them, it might be the right time for you to refinance even if average rates aren’t ideal.

How long has it been since you purchased your home?

This one might go without saying, but if you’ve just recently closed on your home or a previous refinance, you’ll want to hold off on starting the process again right away. Aside from the fact that each transaction involves additional costs like appraisal fees, criteria like your credit score or home equity are unlikely to have changed enough to qualify you for new terms in a short period of time. Unless there’s a drastic shift in rates that you plan to take advantage of, it’s recommended to wait at least six months before refinancing after you’ve closed on your last purchase or refi. Keep in mind that some loan types or lenders may also require specific waiting periods before you’re allowed to refinance. 

So, when should I refinance my mortgage?

Now that we’ve gone over some home refinance pros and cons, let’s revisit whether or not it’s time to refinance your mortgage. 

It might be time to refi if:

• You’ve built up at least 20% equity
• A refi fits your homeownership goals
• Rates are low(er)
• It’s been at least 6 months since your last purchase or refi

Of course, everyone’s situation is unique. These four factors are a good place to start when asking if you should refinance your mortgage, but you should always consult with your own mortgage professionals and financial advisors to determine if it’s right for you. And if you have any questions, we’re here to help.

If your finances are where you want them, it might be the right time for you to refinance even if average rates aren’t ideal.

The post When Should I Refinance My Mortgage? 4 Factors to Consider appeared first on Cardinal Financial.

SPEAKING WITH YOUR FINANCIAL ADVISER IN ADDITION TO YOUR MORTGAGE LENDER IS THE BEST WAY TO HELP YOU ANSWER YOUR REFINANCE QUESTIONS AND DECIDE IF YOU’RE IN A POSITION TO REFINANCE YOUR HOME LOAN.

There are several different ways to refinance your mortgage and each has its merits. To know which refinance method you should choose you’ll have to ask yourself some questions. You’ve got plans; now you just need to figure out how to get there. And it’s important to note that your plans will largely dictate the type of refinancing that’s best for you. Here, we’ve listed seven refinance questions to get your mind moving in the right direction—and to prepare you for future conversations about it with your lender.

1. how long do I plan on living in my current home?

How long you plan on living in your current home is a crucial factor when picking the optimal time to refinance. You’ll want to calculate when you’ll break even, because when you break even, the savings finally outweigh the costs. (Not sure when you’ll break even? Use our refinance calculator to find out.) For example, let’s say you plan on living in your home for at least five years and, based on your calculations, you expect to break even at 17 months. In that case, it’s probably worth it to stay in your home and reap the savings.

2. am I trying to lower my interest rate?

Currently, rates are on the rise, so if you bought your house in the last few years, it probably won’t save you any money to refinance now. However, if you purchased your home more than a decade ago and have not refinanced in the last 10 years, rates are probably low enough for a refinance to make sense. In the case of trying to lower your mortgage interest rate, you’ll want to check with your lender—they’ll be able to tell if you can get in at a lower rate.

3. do I want to pay off debt?

Trying to pay off other debt? Refinancing could free up some money you’d normally put toward your monthly mortgage payment. Have you heard of cash-out refinancing? With a cash-out refinance, you could borrow against your home equity and pay off some debt. Cash-out refinancing is also a popular option for homeowners looking to consolidate debt. If you have debt in multiple areas, a cash-out refinance would combine all of it into one convenient payment, giving you more disposable income.

4. should I tap into my home equity to make a big purchase?

Fourth on our list of refinance questions to ask yourself is about equity. Are you looking to make a big purchase in the near future? Maybe you have your eye on a new car or new furniture. Did you know you could fund that purchase with your home equity? Or maybe your kid is going off to college in the fall. You could refinance and put that cash from your home equity toward tuition, books, or school supplies. Got landscaping or home renovation plans? You could pay for those plans debt-free by refinancing your mortgage and tapping into your home equity. Sounds great—we know. But here’s the kicker: you can only borrow against your home equity up to 80%, meaning you have to retain at least 20% equity in your home after you refinance.

5. should I use my home equity to invest in a rental property?

We get it. You got bit by the investment bug. In this year’s competitive market, it might seem appealing to dive into all the excitement and purchase your own investment property. There’s good news! You could refinance and put your home equity toward buying a rental property. Especially when you’re trying to make money off this property, using your home equity to buy it in the first place only helps to offset the costs. Bet you didn’t know you could do that with a home loan refinance!

6. do I want to shorten my loan term so I can own my home debt-free, sooner?

Is 30 years too long for you? Just can’t wait that long? If you’re itching to get rid of your mortgage debt sooner, you could refinance for a shorter term. This is a popular option for older borrowers who are eager to own their home debt-free for some time and are planning on passing it down to children or grandchildren. But, if that’s not the life stage you’re in, you might just want to enjoy the benefits of a mortgage payment that’s only made up of taxes and insurance. It’s still a mortgage bill, but one that’s significantly cheaper, giving you more financial wiggle room!

7. am I in a position to take on costs associated with refinancing?

If, after you’ve asked yourself all of these refinance questions, everything sounds great so far, we have one more question for you: can you afford the costs associated with refinancing? It almost seems counterintuitive that refinancing to save money would cost you money, but remember the refinance process is similar to purchasing a home in that there are still various fees associated with the transaction. Things like appraisal fees, title fees, and closing costs still apply. No, you’re not having to come to the closing table with a big down payment, but you will have some up-front costs to pay. Good thing Cardinal Financial is on your side. If you’re a Cardinal Financial customer, ask us about fees we waive for our repeat customers!

In sum, this list of refinance questions is not exhaustive, but it should at least provide a starting point and get you thinking in the right direction. Check out our other refi blog posts below for additional insight!

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