When Is It Worth It to Refinance? Here’s How to Know if You’re Ready
Refinancing can be a mysterious process if you’ve never done it before. It involves more than just gathering paperwork—refinancing is a process that involves checking housing market rates and looking at property values in your neighborhood. It also requires you to do a little math on your end to determine if it’s worth it to refinance.
If you’re unfamiliar with the term, refinancing involves replacing your current mortgage loan with a new one that has a better interest rate or longer term.
A lower interest rate means lower monthly payments. Lower monthly payments mean you have more money to attend to life’s other demands.
But when is it worth it to refinance? Here’s how to tell.
First, Know Why You’re Refinancing
Refinancing can potentially save you money, but many homeowners often have more complex reasons for wanting to go through the refinancing process. When asking yourself if it’s worth it to refinance, think about your own financial goals first.
Some of the most common reasons for refinancing include:
- Securing a better interest rate when rates drop. Rates have been low during the coronavirus pandemic but may begin to rise again.
- Shortening or lengthening the mortgage repayment term. A shorter term means you can pay off your mortgage faster (and save on interest payments). A longer term means your monthly payment is lower, giving you more short-term money in your pocket.
- Switching from one type of mortgage rate to another. Such as a fixed-rate mortgage or adjustable-rate mortgage.
- Accessing home equity to cover a significant purchase, settle a financial emergency, or consolidate debts. Read more about cash-out refinances and how they can help with big costs.
Financial Considerations Before Refinancing
There are lots of external factors to look at when determining when it’s worth it to refinance. Let’s go over them.
Make sure market interest rates have dropped enough to save you money after paying closing costs.
Advisors generally suggest that refinancing is beneficial if you can secure an interest rate drop of at least 2%. Less than that may not yield the desired results. However, even 1% may prove a good enough refinance incentive, depending on your mortgage amount.
Some financial institutions have certain requirements on how long you’ve owned your home before you refinance. Typically, that’s 12 months, but it can vary from lender to lender. Be sure to shop around to learn what different institutions require.
If you’re doing a cash-out refinance, you’ll need to have built up around 20% in home equity (in other words, paid off about 20% of your home).
Your home’s current market value will impact possible interest rates. Some lenders require home appraisals to help determine the rate they can offer you.
You should also check if prices in your area have generally increased or decreased since you first bought your home.
Requirements for Refinancing
Even if the market is favorable, you’ll have to meet certain criteria and pay certain fees in order to refinance. If you don’t fit some of these requirements or you find that associates fees are too high, it may not be the right time to adjust your interest rate.
That said, it’s also worth it to inquire with a lender of your choosing before you make a decision if you’re not sure if it’s worth it to refinance.
1. Lender’s Criteria
Different lenders—from private institutions to big banks—have different qualifying criteria. Now is the time to shop around and look at your options. Even if you don’t meet one lender’s requirements, you may meet another’s.
2. A Year (or So) of Home Ownership
You need to have owned your home and have been paying off the original mortgage for at least a year (or sometimes more) for a cash-out refinance. Some lenders will approve you if you’ve had your mortgage for only 6 months. If you have an FHA loan, you’ll have to wait at least 210 days.
3. Fees for Application
Be aware that your lender may charge you to process your application, so be prepared to pay fees to cover their credit checks and overall financial assessments. These fees will vary from lender to lender, so be sure to ask before signing the dotted line.
4. Inspection & Appraisal Costs
Your lender will more than likely want a current home appraisal. They may also require a liability inspection. These costs add up, so be prepared to cover these.
5. Closing Fees
Closing fees will also apply so that a lawyer can write up your new loan terms. It can cost between 2 and 5% of the loan’s value, so these can be pretty significant.
You’ll want to do some math to ensure refinancing will save you more money than you’d be spending on closing fees and other costs.
Does the Time of Year Matter?
When considering when is it worth it to refinance, seasonal timing can make a difference.
The housing market is slower or faster at different times of the year. It typically slows in winter, leading housing lenders to lower their rates to keep business flowing. This is great news for homebuyers and refinancers.
That being said, you should keep an eye on the market at all times throughout the year. Interest rates tend to go down if the market skyrockets, which can happen unexpectedly.
If you’re ready, what’s next?
So, you meet all the common criteria, you’ve done the math and learned you can save a lot by refinancing, and rates are low. What’s next?
You should reach out to a team member here at Associates Home Loan. We can help you get started on the process or answer any questions you may have if you’re still not sure if it’s worth it to refinance. We’re here for Florida homeowners—including you.