The Benefits of Refinancing Your Home — Strategically

Image of the inside of a furnished house. Captioned: The Benefits of Refinancing Your Home - Stategically

Throughout the years of your mortgage, you’ll likely ask the question more than once: Is now the right time to refinance? First, note that refinancing may be no easier than getting that existing loan. Moreover, from 2020 on, expect lenders to have stringent requirements for mortgage approvals.

The answer will depend, too, on varied factors specific to your own situation.

Here are a few reasons refinancing could make a lot of sense — or not.

If You Hope to Lower Your Payments

A leading aim of refinancing is to decrease the monthly payment due. The more cash you keep available to use, the more options you have. So, for example, you might lower your payments by switching from a 15-year mortgage to a 30-year version. You’ll be paying more interest over time, but your current goals might justify that, especially when the rates are low. 

Indeed, you don’t even need to have any pressing goals, other than to invest. What you save in monthly mortgage charges might perform better for you if it’s invested in stocks, so that’s another variable to keep in mind.

Pro tip: Your escrow account is the money reserved for third-party charges, such as property taxes. If you refinance your home loan, you might be able to count your current escrow funds as credit for the new loan to lower your new debt principal. Ask your mortgage specialist whether this option — known as netting your escrow — can be done if you refinance your home.

If You’re Not Moving Any Time Soon

Do you plan to stay in your home and make mortgage payments on it for several more years? If so, you’ll be more likely to recover your money spent in fees, appraisal costs, and other closing costs, which can easily add up to a few thousand dollars. (The cost of refinancing can run 3%-6% of the mortgage total!)  

To break down the numbers, try comparing your current and proposed loan by calculating principal, mortgage rate, term of years and amortization. If refinancing will cost you about $3,000, how many months will it take, with your monthly payment savings, to break even and recover that outlay? Will your new, lower rate really offset the cost of refinancing?

Pro tip: Points (each point amounting to 1% of the mortgage) may be paid at closing to get a lower interest rate. Don’t forget to consider any points you pay on the current and the proposed loan — whether they’re taken in closing costs, or added into your loan principal.

If You’re in No Hurry

Whenever rates drop and refinancing looks especially enticing, mortgage companies receive many refinancing applications to handle at the same time. They’ll hear from many of their former clients in addition to the new clients they’re assisting with home purchases. When industry experts are stretched, the process can take longer.

Use the time to let your tax consultant know of your plans. Tax deductions change over time. Modifying your mortgage interest could have some impact on your annual tax return, although it’s unlikely to be major.

If You Hope to Stop Paying an Adjustable Rate

Your adjustable-rate mortgage might have served you well so far, but what if rates go up in the future?  That will make your mortgage more expensive.

Those pesky percentages add up over time. In this situation, applying for a fixed-rate mortgage, if you can lock in a low rate, makes sense.

If You’re Ready to Shake Off That PMI

If your existing mortgage has a private mortgage insurance charge tacked on, and you’re now in an improved financial situation, speak with your mortgage pro about getting a new loan, so you can enjoy your lowest possible mortgage rate without paying extra.

Note that PMI can work the other way, too. For example, has the market value of your home dipped? If so, refinancing could put you in the position of having to pay PMI even if you don’t pay it now. That will put a damper on the reward you’ll get out of refinancing. Here again, speak with your mortgage specialist and get an opinion on the cost and benefit.

If You Need to Pay Your Debt Off Faster

You might want to pay your loan off faster, especially if you are coming into your golden years and want to plan to have your debt out of the way rather than risk burdening your heirs. But think very carefully before shifting to a 15-year loan on your primary residence. It limits the choices you can make with your income, and you just never know when you might need those choices.

Arguably, the better strategy is to stick with a 30-year mortgage, but pay extra each month on the principal. You will save money on interest without going through the steps of refinancing. Should you happen to face any financial challenges, simply discontinue your extra payments on the principal.

If You’re in the Position to Obtain a Drama-Free Approval

You are most likely to be approved without too many cliffhangers in the process if you:

  • Have a stable job situation. If your job, earning capacity, or income sources have changed since you were approved for your present mortgage, it might be harder to qualify for a new loan — especially if your life changes occurred in the past two years.
  • Receive W-2 income rather than depend on contracts with various clients. There’s no rule against loan approvals for entrepreneurs and contract workers; it just means the mortgage specialist is going to work harder to show the loan underwriter your consistent capacity to repay debt.  
  • Are paid up on your existing mortgage, and are keeping your credit score in great shape — optimally, in the mid- or high-700s.
  • Have built up 20% home equity or more. Home equity is not hard to calculate. It amounts to your ownership interest in the home, which is simply the current market value, less your current mortgage debt. Popular websites such as can show you the rough market value of your home before you start the work of hiring an appraiser.

Some lenders are stricter than others, so contact your mortgage representative and discuss your personal stats! It can be frustrating to run into hurdles, but it’s truly in a homeowner’s best interest to earn at least four times the money as the home payments every month. Unexpected repairs and surprisingly expensive appliance replacements do happen, often. And those are just the unexpected costs related to owning a house.

An emergency cash reserve, just in case you need to fall back on it during difficult times, is a great thing to have. 

Everyone’s Circumstances and Goals Are Unique

When the time is right, and so are your own set of circumstances, take advantage of relatively low rates when they occur. If your home’s existing mortgage rate is on the high side, and you have built up a strong level of equity, you could achieve substantial savings by refinancing your mortgage.

Your mortgage specialist will ask you about the balance of your current loan, and the equity you can bring to the table. Begin by asking for this experienced professional’s opinion and go from there.

Photo credit: Chastity Cortijo, via Unsplash.