Should I refinance?

Deciding whether to refinance your mortgage involves more than simply comparing your current interest rate with today’s rates. The right refinance should accomplish a specific financial goal and make sense after considering the costs, monthly savings, loan term and how long you expect to own the home.

There are many situations where refinancing may be worth considering. The key is determining whether the numbers and the loan structure make sense for your individual circumstances.

Common Reasons to Refinance a Mortgage

Lower your interest rate and monthly payment. A lower rate may reduce your monthly principal and interest payment and potentially decrease the amount of interest paid over time.
Remove mortgage insurance. Depending on your current loan type, available equity and other qualification requirements, refinancing may provide an opportunity to eliminate monthly mortgage insurance.
Consolidate higher-interest debt. Homeowners with sufficient equity may consider a cash-out refinance to pay off credit cards, personal loans or other higher-interest obligations. This should be evaluated carefully because unsecured debt is being converted into debt secured by your home.
Access equity for home improvements. A refinance may allow you to use equity for renovations, repairs or other major expenses.
Change the length of your mortgage. Some homeowners refinance from a 30-year mortgage into a shorter term such as a 15- or 20-year loan. Others may choose a longer term to reduce the required monthly payment.
Change from an adjustable-rate to a fixed-rate mortgage. Refinancing may provide greater payment stability for homeowners who currently have an adjustable-rate mortgage.
Change loan programs. Depending on your circumstances, it may make sense to refinance from one type of mortgage into another.
Add or remove a borrower. Life changes such as divorce, marriage or other circumstances may create a need to restructure who is obligated on the mortgage, subject to qualification requirements.

Don’t Look at the Interest Rate Alone

A lower interest rate does not automatically mean refinancing is the right decision. Closing costs, lender fees, title-related expenses, prepaid items and the structure of the new loan all need to be considered.

For example, a refinance that saves $200 per month but costs $6,000 to complete has a very different financial impact from one that provides similar savings with substantially lower costs. Understanding how long it takes to recover the cost of refinancing can help determine whether the transaction makes financial sense.

Consider the Loan Term, Not Just the Payment

One commonly overlooked issue is restarting the mortgage term. If you have already paid several years on a 30-year mortgage and refinance into a new 30-year loan, your required monthly payment may decrease, but you may also extend the amount of time you are making mortgage payments.

That does not necessarily make the refinance a bad decision. In some situations, improving monthly cash flow is the primary objective. In others, choosing a shorter loan term may better accomplish the homeowner’s long-term goals.

What About a Cash-Out Refinance?

A cash-out refinance allows qualified homeowners to replace their existing mortgage with a larger loan and receive a portion of their available equity in cash. The funds can potentially be used for home improvements, debt consolidation, major expenses or other purposes.

Because a cash-out refinance increases the mortgage balance and uses your home as collateral, the benefits and long-term costs should be evaluated carefully before moving forward.

When Does Refinancing Make Sense?

There isn’t one interest-rate difference or savings amount that makes refinancing worthwhile for everyone. Your current mortgage balance, existing interest rate, available equity, credit profile, new loan terms, closing costs and expected time in the property all matter.

A good refinance analysis should compare your current mortgage with the proposed new loan and clearly show the costs, monthly payment difference and potential short- and long-term impact.

Not Sure Whether You Should Refinance?

If you’re considering refinancing a home in Maryland, Washington DC or Virginia, I can review your current mortgage and your goals and help you determine whether refinancing is worth exploring.

Sometimes refinancing makes sense. Sometimes keeping the mortgage you already have is the better financial decision. My goal is to help you understand the numbers so you can make an informed choice.

Have questions about refinancing? Contact me and I’ll be happy to review your situation with you.