When Is The Right Time To Refinance?

When loan rates start to drop, many of us wonder, “Should we refinance our house?” It’s completely natural to want to save money. But is it a wise financial choice?

Understanding the cost.

The first main factor in deciding whether or not to refinance your mortgage is the cost. Are you financially prepared for the upfront cost of a refinance? Do you have the LTV (loan to value) to roll the costs into your new loan? Do you have the cash to pay for them out of pocket if not? Are the funds available to cover an application fee, appraisal, and other upfront costs? All of these external costs, not just the value of the loan, need to be taken into consideration. It’s especially important to understand the closing costs of the loan prior to beginning the process, as many lenders have a cancellation fee/non-refundable application fee.

Understanding your goal.

Another factor to consider in your decision to refinance is how it will impact your financial goals. What is the ultimate goal you want to achieve from the refinance? Are you planning to lower your monthly payment? Switch from a 30-year term to a 15-year term? Do you need to get extra cash to complete a home renovation? All of these questions are valid to consider. Ultimately, the goal needs to be to benefit your overall financial health. The best reason to refinance is to help you pay off your loan faster. We do not recommend a cash-out refinance to pay for home improvements, as that can have negative long-term effects on your financial health.

Understanding the value.

The final factor to consider is how valuable is this investment of your time and money going to pan out? Is the refinance going to save you money temporarily, but cost more over the long term due to added fees and closing costs? Will it add time to the length of your mortgage and therefore the cost of your home overall? The best way to calculate this is with an amortization calculator or amortization schedule. This allows you to calculate not only the loan payment but also shows the interest paid over the life of the loan. It can help you break down if you will save more than you will spend on the refinance, and it can help you see the true cost of your home and your mortgage.

Ultimately, it comes down to your financial health. What is best for you and your family? What can you afford? And how will it help you reach your financial goals?

Let us know in the comments section what your thoughts are on refinancing a mortgage. We love to hear from you!