When should you refinance your mortgage?
Refinancing your mortgage can lower your interest rate and monthly payments, saving you money now and over the lifetime of your loan. If you have equity in your home, you can even take cash out while refinancing to help consolidate debts or fund home renovations. Even when there’s a market with higher rates that might deter some from getting a refinance, refinancing may still be a great option depending on your financial situation.
When to refinance your home
Knowing the best time to refinance your home depends entirely on your situation. Keep in mind that there are refinance options, and one type of refinance may fit your plans better than another.
- Homeowners can choose from various refinance options, such as rate and term or cash out refinances.
- There are plenty of reasons to consider a refinance. You may be able to lower your mortgage rate to save money, get cash from your home’s equity, and change your loan terms.
- In some cases, you may want to wait to refinance so you can improve your debt-to-income (DTI) ratio, build up your home equity, or increase your credit score to get more favorable refinance terms.
Every homeowner’s situation is unique, and there isn’t a single “golden rule” when it comes to refinancing your home. Coupled with the fact that there are countless reasons why someone may want to refinance their home, knowing when you should refinance can be confusing. Learning more about how refinances work and why you might want to apply for one can help you determine whether you should refinance now or wait for a better time.
How does a refinance work?
A refinance is a type of loan that replaces your current mortgage, and the application process is like what you went through for a mortgage.
How your refinance works depends on whether you choose a rate and term or cash out refinance. A rate and term refinance is when your new loan replaces the balance on your old loan, whereas a cash out refinance is when your new loan has a greater value than the balance on your existing mortgage. A cash out refinance allows you to borrow from the equity in your home, and the cash you receive can be used for anything from home renovations to debt consolidation.
With both types of refinance, the process typically breaks down into these steps:
- Choose a refinance: Decide whether you want a “rate and term” or “cash out” refinance.
- Decide on a type of interest rate: Whether you would like your new loan to be a fixed-rate or adjustable-rate mortgage (ARM), you will want to figure out what works best for your budget before selecting a loan product.
- Get your finances in order: A mortgage refinance may be for a large amount of money and could potentially have a big impact on your overall finances. Make sure to understand your monthly expenses and what you can afford before you begin your search.
- Compare lenders: Review the eligibility requirements that lenders typically have and get multiple interest rate quotes. You may find that a lower interest rate doesn’t outweigh the amount of closing costs you may have to pay upfront. Or, you may find that a lender’s offer to cover closing costs but charge a higher interest rate could work for your situation.
- Apply: Pick the lender with the refinance product you think will work the best for you, and do the necessary paperwork required for an application. Many lenders offer the option to apply online, but you can also take the opportunity to apply over the phone or in-person if your lender offers it.
- Application processing: Your lender will check your application to be sure you meet all the eligibility requirements to qualify for a new loan. During this time, you may be asked to provide additional documentation to verify details such as your income or existing payments. Like with taking out a new mortgage, your lender may order an appraisal to determine your home’s current value or look to run a title search.
- Schedule a closing appointment: At your loan’s closing, you will sign the necessary paperwork to complete the refinance process. You’ll be provided with a set of Closing Documents that define the terms of your new loan. You can prepare for closing by reviewing documentation of all the fees you will need to pay and bringing a cashier's check to cover any balances.
When is a good time to refinance your home
Because there is no definitive answer as to when you should refinance your mortgage, the best time to refinance your mortgage is going to be heavily dependent on your own personal circumstances.
It can be a good idea to refinance your mortgage if:
- You’ve had your original mortgage for at least six months. This is a requirement for many lenders.
- You plan on staying in your current home: Since there are closing costs associated with a mortgage refinance, it may be best to refinance when you’re planning on living in your home for quite some time. Paying thousands of dollars in closing costs and fees probably doesn’t make sense if you are just going to sell your home a few months down the road. However, if you plan to sell soon and can find a no closing cost refinance, going with that option may save you money.
- You can lower your interest rate. If market rates are lower than your original rate or your measures of credit and income are improved from your original mortgage, you can take this opportunity to refinance and decrease your monthly payments. If you’re curious to see how much refinancing could save you, use this mortgage refinance calculator to get an idea of your potential savings.
- You’ve built equity in your home. If the appraised value of your home exceeds the amount you still owe, you can tap into that equity with a cash out refinance.
- You have a good credit score. The higher your credit score, the more likely it is that you may be able to get approved and possibly receive offers for more favorable loan terms.
Other reasons to consider a mortgage refinance include:
- Pay off your mortgage loan faster. If you’re paying off a 30-year mortgage, you can refinance it to a 15 or 20-year term, allowing you to pay off your loan faster. While your monthly payments may increase when you shorten your loan’s term, you’ll likely pay less interest in the long run.
- Lower monthly payments. With a lower interest rate locked in, generally, you can enjoy lower monthly payments over the lifetime of your new loan. Decreased payments over a fifteen or thirty-year period can, depending on your circumstances, amount to significant savings. You can also refinance into a longer-term mortgage — while this will lengthen the amount of time you pay your mortgage, it can reduce monthly payments.
- Lower interest rates. If market interest rates are low, you can choose one of those new, lower rates when refinancing your mortgage. This may help you save money and pay less total monthly interest. If your original mortgage was taken out when you had a lower credit score or less income, you may also find that the current rates available to you through refinancing are improved. Converting to a lower-rate mortgage through a refinance can help you reduce your interest charges over the life of the refinanced loan.
- Cash out equity. If you’ve built up equity in your home, you may be able to convert that equity into cash while refinancing with a cash out refinance. You can use that money for home renovation projects or having emergency cash on hand. If you have a considerable amount of high-interest personal debt such as credit cards or personal loans, accessing some of your home’s equity to pay it off could save a lot of money in interest payments over time. Using a debt consolidation calculator can help you determine if this makes sense for your finances.
When not to refinance a mortgage
Ultimately, the best time to refinance a mortgage is when you financially benefit from refinancing. This means you should probably wait to refinance your mortgage if the refinance will have no effect on your finances or will be a detriment to your finances due to closing costs and fees.
It may not be a good time to refinance your home if:
- You’re planning to sell your home or pay off your mortgage soon: If you’re looking to sell your home soon, you won’t be able to enjoy the benefits of your new mortgage, and it’ll be tough to justify spending time and money on refinancing.
- You’re still building up your credit score: You may want to take time to prove your creditworthiness and increase your credit score by making on-time debt payments in full and keeping your credit utilization ratio low. Once your credit score is healthy, you can apply for a refinance to see if your interest rates are competitive.
- Market interest rates are high: You don’t want to get stuck with a higher or even similar interest rate on top of additional refinancing fees and closing costs. Shopping between lenders can help you understand if competitive rates are available when compared to your original mortgage.
- Home values have decreased: If average home values in your area have decreased considerably, you may want to wait on a refinance since there is potential your home could appraise at a lower value than when you purchased it.
FAQs: When you should refinance your mortgage
Refinancing a mortgage can be an effective way to save money or tap into equity. Refinancing your mortgage should only be done when you can financially benefit from the transaction. At the end of the day, the mortgage refinance process is time-consuming and may come with quite a few expenses, so it’s important to weigh both the costs and the benefits of refinancing your mortgage before doing so.
How often can you refinance?
Although there is no legal limit to the number of times you can refinance your home, most lenders have their own qualifications. Most lenders require you to wait at least six months after your most recent closing (whether that be from the purchase or a previous refinance of your home) to refinance the loan, though closing costs and fees can make frequent refinancing an ineffective strategy.
Does refinancing cost money?
Unfortunately, refinancing your home can cost money upfront. Much like when you purchased your home, you will have to pay for the closing costs and fees such as origination fees, appraisal fees, application fees, credit check fees, and more. However, some lenders don’t charge closing costs. For example, Discover® Home Loans charges zero application fees, zero origination fees, zero appraisal fees, and there’s no cash due at closing.
Should I refinance my mortgage with the same lender?
You can choose to refinance your mortgage with your original lender or shop for a new lender with a more competitive offer.
To help you decide, let’s look at the advantages of staying with the same mortgage lender:
- Quicker refinancing process. The lender already has access to your mortgage information on file, so they can make a quick decision.
- Access to more favorable loan terms. Many lenders offer these as an incentive to staying with their bank.
- The ability to negotiate closing costs. Because you already have an established relationship, you may have a better chance of asking the lender to waive or reduce some of the fees.
Even if you enjoy working with your original lender, it’s wise to research alternatives and compare offers to find the best deal. You can even go to a new lender and ask them to beat your original lender’s offer.
How long does it take to refinance?
The specific amount of time will vary by lender, but a refinance usually takes several weeks to close. This is because the home needs to be appraised and inspected, and the lender needs to prepare all the proper paperwork.
The timeline can be broken down like this:
1. Getting the basics (around 1-2 weeks)
Apply online or over the phone to review your loan options, then upload the required documents. We’ll confirm your initial eligibility.
2. Processing your information (around 4 weeks)
We’ll gather third-party information about your home and then send your complete application to underwriting for a final decision.
3. Closing your loan (around 1-2 weeks)
We’ll contact you to schedule your closing and then arrange for your loan funds to be sent to your accounts.
When you apply for a mortgage refinance, you will receive updates on your progress all along the way. In general, the faster you can provide the requested information to confirm your eligibility, the quicker your loan file will move through the application process.
What are the benefits of refinancing?
There are many benefits of refinancing your mortgage, but the most prominent ones are saving money by lowering your interest rate and pulling equity out of your home. However, there may be other benefits for you depending on your situation, such as lowering your monthly payment or extending the term of your loan.
Does refinancing hurt your credit?
Refinancing may hurt your credit slightly in the short term, as you will get a new hard inquiry and a new account on your credit report. However, the potential benefits of refinancing your mortgage often steeply outweigh any potential small short-term detriments to your credit score.