Many people are asking whether or not now is a good time to refinance their mortgage – and with good reason! Locking in a mortgage at a lower interest rate can dramatically reduce the amount of money you pay over time. However, refinancing isn’t for everyone. There are some cases when refinancing your mortgage may not make sense, and could be an unnecessary financial hassle.
What to Know About Refinancing
First, let’s go over the process of refinancing your mortgage. Refinancing your mortgage means replacing your current mortgage with a new one – ideally one that has a lower interest rate, or better terms. To refinance, you need to qualify for your new mortgage – just like you did when you originally bought your home. You go through an application, underwriting, and a closing process. Ideally, when you refinance, you should have a couple of key goals:
- Reducing your monthly payment.
- Adjusting your timeline to pay off your mortgage more quickly.
When Should You Refinance?
There are a few key situations where refinancing your mortgage makes sense. First and foremost, if your mortgage is at an interest rate of 4% or above, you should look into refinancing. Currently, mortgage rates are at all-time-lows, which means you could potentially lock in a mortgage at 3.0% to 3.5% and save yourself a notable amount of money in the long run.
Another situation where refinancing often makes sense is if you are in an ARM (adjustable-rate mortgage) from many years ago. In these cases, you may want to refinance to extend your time horizon and lock in a lower rate.
Finally, if you anticipate a career change in the near future, refinancing before you go through the transition is ideal. After you make a big career change, qualifying for a new mortgage (especially one with a lower interest rate) can be challenging. So, plan ahead! If you know you’re planning to make a change, evaluate whether or not your mortgage can be adjusted now to bring you more favorable outcomes in the long term.
When You Shouldn’t Refinance
Refinancing your mortgage can have a wide range of benefits, and positively impact your finances in the long term. However, there are a few situations where refinancing doesn’t always make sense.
Of course, if you look to refinance and your mortgage rate is lower than the ones offered, don’t take the leap. This seems like a no-brainer, but it’s worth mentioning!
Additionally, if you’re planning to pay your mortgage off in short order, refinancing now will cause more problems than it solves. This process takes time and energy, can cause some turbulence with your credit score when the bank reviews your credit, and closing costs may be more expensive than they’re worth. Similarly, if you plan to sell your home soon, refinancing may not make sense for you.
Remember: Refinancing Doesn’t Have to Extend Your Mortgage Pay-Off Timeline
One thing we often hear people say about refinancing their mortgage is that they’re already so deep into a mortgage, that they don’t want to “extend their pay-off timeline.” It’s important to remember that, even if you’re 10 or 15 years into a 30-year mortgage, that doesn’t really mean anything. You can pay off your new mortgage at any time.
If you’re thinking about refinancing your mortgage, make sure you check in with your financial planner to evaluate whether or not it’s the right decision for you. Schedule a call with us, or shoot us a note, by clicking here!