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. There are plenty of options for refinancing, including a cash-out refinance loan with Discover®, which offers low, fixed rates and no cash due at closing.

While there are many benefits to refinancing, there are several factors to consider before jumping in. Since you’ll be replacing your existing loan with a new one, you’ll want to make sure you’re financially ready. It’s also important to know when it makes most sense to refinance based on market rates and your home’s value.

So, should you refinance your home? Here’s what you need to know.

Why do people refinance their homes?

There are plenty of great reasons to refinance, including lower payments and debt consolidation.

To 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 monthly interest over time.

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.

To 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.

Use a Discover monthly payment calculator to find a rate and monthly payment that fits your budget.

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.

To pay off your mortgage loan faster

If you’re paying off a thirty-year mortgage, you can refinance to a fifteen or twenty-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.

To earn cash-out

If you’ve built up equity in your home, you may be able to convert that equity into cash while refinancing. You can use that money to pay for home renovation projects, pay off existing debts, or just have emergency cash on hand.

If you owe $150,000 on your mortgage, but your home value is $300,000, you have $150,000 in equity. Most lenders will let you use 80% of that equity, or $120,000 for your projects.

Use a Discover cash-out refinance calculator to see how much you can borrow.

Should I refinance my house if I plan to sell?

If you’re planning to sell your home in the next five years, it may not make sense to refinance your mortgage. That’s because refinancing can come with fees and closing costs. The savings might not offset the costs if you plan to sell soon.

If you plan to stay in your home longer than five years, however, refinancing might save you money.

Should I refinance my home to pay off debt?

Paying off debt is a common reason for refinancing. With a cash-out refinance, you can tap into your home equity and access a lump sum of cash, which you can use to pay off outstanding debts like high interest credit cards, medical bills or student loans. Your payments will be consolidated into one monthly bill, making it easier to keep track of your finances.

Use a Discover debt consolidation calculator to see how much you can save by combining your debts.

Should I refinance my house 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 have a better chance of getting 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.

Should I refinance my mortgage now or wait?

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 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.
• 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. A good credit score, in the mid-600 range or above, can help you get approved and for possibly more favorable loan terms.

When not to refinance a mortgage

It may not be a good time to refinance your home if:

• 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.
• 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.
• 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.