From funding home improvements to paying off your mortgage faster, there’s a lot a refinance can do. In order to make the most of a refi, though, it’s important to get the timing right. If you’re wondering, “When should I refinance my mortgage?”, you came to the right blog. Let’s break down some home the key factors that determine when you should start the process.
When should I refinance my mortgage? 4 factors to consider
- How much home equity do you have?
- What are your mortgage goals?
- What are the current interest rates?
- How long has it been since you purchased your home?
How much home equity do you have?
One of the biggest advantages of owning a home over renting is the ability to build equity. Home equity is what your home is worth in the current market, less the amount owed on any mortgage. In other words, it’s the percentage of your home that you own. Unlike monthly rent, every payment you make on your mortgage gets you closer to paying it off entirely, all while your home equity keeps accumulating.
If your home equity is high, you could leverage it for better rates, cash out, or a new loan type when you refinance. So, how much equity is a lot of equity? As in all things mortgage, it depends on your unique financial situation. In general, you’ll want to aim for at least 20% equity in your home before considering a refinance.
What are your mortgage goals?
When most people think of refinancing, the first thing that comes to mind is a rate and term refinance. As the name implies, a rate and term refinance allows you to get a new rate and/or term on your mortgage. You may also be able to refinance to a different loan type that better meets your needs. It’s not the only option out there, though.
A refinance can also be used to fund home renovations, leverage your home equity for cash, and more. The goal you have in mind can help you determine if it’s the right time to refinance. For example, if your goal is lower rates and rates are higher than usual, it might be better to wait until rates drop. If your goal is to boost equity with renovations, seasonality might be important to factor into your decision as well.
Top 5 reasons to refi
- Lower your interest rate to get a lower monthly mortgage payment.
- Get cash out of your home equity to get funds for home reno, remodeling, and more.
- Consolidate debt* to make fewer loan payments on a monthly basis.
- Pay the same amount each month to gain financial stability.
- Pay off your mortgage faster to save on interest and gain complete ownership.
*Using your home equity to pay off debts or make other purchases does not eliminate the debt or the cost of the purchases, but rather increases the loan amount of your mortgage to be paid according to your new mortgage terms.
What are the current interest rates?
Speaking of rates, let’s discuss the elephant in the room. While rates aren’t the only factor to consider when asking, “When should I refinance my mortgage?” they’re undeniably an important one. No matter your mortgage goals, rates will impact your ability to reach them.
Yes, lower rates are typically more desirable. But unfortunately, when it comes to average market rates, there’s only so much you can control. It’s up to you to decide if it’s worth it to hold off on refinancing until average rates are lower. And there’s always the risk that if you wait for rates to get lower, they may actually go up instead.
It’s not an easy decision, but remember that your best rates don’t only depend on the market. Factors like your credit score, home equity, and debt-to-income ratio (DTI) can also help you qualify for better rates regardless of the market. So, if your finances are where you want them, it might be the right time for you to refinance even if average rates aren’t ideal.
How long has it been since you purchased your home?
This one might go without saying, but if you’ve just recently closed on your home or a previous refinance, you’ll want to hold off on starting the process again right away. Aside from the fact that each transaction involves additional costs like appraisal fees, criteria like your credit score or home equity are unlikely to have changed enough to qualify you for new terms in a short period of time. Unless there’s a drastic shift in rates that you plan to take advantage of, it’s recommended to wait at least six months before refinancing after you’ve closed on your last purchase or refi. Keep in mind that some loan types or lenders may also require specific waiting periods before you’re allowed to refinance.
So, when should I refinance my mortgage?
Now that we’ve gone over some home refinance pros and cons, let’s revisit whether or not it’s time to refinance your mortgage.
It might be time to refi if:
- You’ve built up at least 20% equity
- A refi fits your homeownership goals
- Rates are low(er)
- It’s been at least 6 months since your last purchase or refi
Of course, everyone’s situation is unique. These four factors are a good place to start when asking if you should refinance your mortgage, but you should always consult with your own mortgage professionals and financial advisors to determine if it’s right for you. And if you have any questions, we’re here to help.
If your finances are where you want them, it might be the right time for you to refinance even if average rates aren’t ideal.
