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Mortgage Refinancing: When Does It Make Sense?

Mortgage Refinancing: When Does It Make Sense?

Expecting couple thinking of refinancing

Have you been trying to figure out how you can manage that large expense or high interest debt and are considering financing alternatives? Refinancing your mortgage might be the answer. But before you start browsing for different mortgage options and comparing rates, it’s important to understand what’s involved when you refinance your mortgage.

Firstly, you need to know if you qualify to refinance your mortgage at all. If you have at least 20% equity in your home, you may qualify to refinance your mortgage. Breaking your existing mortgage and potentially facing prepayment fees might seem overwhelming but refinancing does come with its perks. Lowering your overall costs, consolidating debt, or accessing funds for home renovations or other significant expenses are just a few potential benefits.

Before you move ahead with refinancing your mortgage, it’s beneficial to grasp the ins and outs of the process. Understanding what it involves will help you determine if it’s the right move in your unique circumstances and will help you identify the best time to refinance your mortgage as well.

What Does Refinancing Your Mortgage Mean?

Refinancing your mortgage means swapping out your current home loan for a new one. This lets you use the money you’ve built up in your home to extract some cash. You can use this cash for lots of things, like fixing up your house, buying a big-ticket item like a car, paying for education, or even paying off expensive debts like credit card balances.

The process of refinancing your home mortgage is pretty straightforward. It’s kind of like applying for a mortgage all over again, so it’s not too complicated for homeowners to understand and do.

When Does A Mortgage Refinance Make Sense?

Refinancing your mortgage can be a smart move if you meet certain conditions and it will usually save you money. Since it’s like getting a new mortgage, these are things to consider when refinancing:

  • Make sure you have enough equity in your home (at least 20%).
  • Keep your credit score healthy.
  • Have a steady income.
  • Stay within the debt service ratio limits.
  • Pass the mortgage stress test and show lenders you can handle the current qualifying rate.
  • Maintain a loan-to-value (LTV) ratio below 80%.

Refinancing your mortgage is most beneficial when interest rates have dropped since you obtained your original mortgage. Keep in mind that there are fees and penalties involved in breaking your current mortgage, so you need to be sure you’ll save money in the long run to have it make sense financially.

Even if interest rates haven’t fallen much, refinancing can still be a good idea if you want to consolidate high-interest debts like credit card balances or personal loans. By rolling these debts into your mortgage, you’ll end up owing the same amount overall, but with a lower interest rate, potentially saving you money in the long term.

How Much Cash Can You Access If You Refinance?

According to current regulations, you can borrow up to 80% of your home’s appraised value. However, from this amount, you need to subtract the remaining balance on your mortgage, any outstanding balance on a home equity line of credit (HELOC), if you have one, and any other loans that use your home as collateral. The more you’ve paid off your mortgage, the more cash you can get through refinancing.

Let’s look at an example. Suppose your home is valued at $850,000, and you’ve been steadily paying down your mortgage, leaving you with a remaining balance of around $500,000. In this case, 80% of your home’s value would be $680,000. Subtracting the $500,000 you still owe, you could potentially access about $180,000 in equity. 

Some Of The Best Reasons to Refinance

Your decision to refinance will hinge on your individual financial circumstances, but here are three common reasons people choose to do so:

Lowering your interest rate: If you have a fixed-rate mortgage, you might feel stuck with a higher rate while new borrowers enjoy lower rates. Refinancing allows you to seize those lower rates, even though it comes with its own costs, the potential savings often make it worthwhile. You can estimate your potential savings using my online mortgage calculator or by consulting an experienced mortgage broker like myself.

Accessing cash from your equity: Refinancing can also be a way to unlock the equity you’ve built up in your home, especially if you’re short on savings or cash flow. By tapping into this equity, you can free up cash for home improvements, a vacation, educational expenses, or even a down payment gift for your children to help them buy a home in today’s hot real estate market.

Adjusting your loan terms: Refinancing gives you the opportunity to change your mortgage terms for the better, such as increasing prepayment options or adjusting the length of the loan term to better suit your financial goals.

How To Decide If It’s The Right Time To Refinance Your Mortgage

While having a solid reason to refinance is key, it’s equally important to consider the timing and various factors that could impact your decision. Specifically, you should consider these key pieces of the puzzle before moving forward with refinancing your mortgage:

Costs: Refinancing involves upfront expenses that you’ll need to cover, including legal fees (such as lawyers’ fees, title search, and title insurance), prepayment penalties, and discharge fees.

Creditworthiness: Since refinancing entails obtaining a new loan, lenders will assess your credit score and history. A higher credit score increases your chances of approval. However, lenders have different criteria, and your credit score is just one factor. The minimum required credit score may vary depending on the lender.

Savings or Financial Goals: The decision to refinance often hinges on whether it will save you money or help you achieve a financial goal. If refinancing results in only minor savings, it may not be worth it. However, if it saves you a substantial amount over the mortgage’s lifespan, it’s likely worthwhile.

Consider how refinancing can help you reach financial objectives, such as consolidating debt, funding home renovations, covering your children’s education costs, or managing other significant expenses. Depending on your goals, refinancing could be a viable strategy to accomplish them.

If Mortgage Refinancing Sounds Like A Good Plan For You, Call Me

Refinancing a mortgage can help you save money in the long run — if you carefully consider the timing and your reason for taking this step. Consulting with me, as an experienced mortgage broker and financial advisor is a smart move so that we can look at your situation and consider the best alternatives for you. I can offer you different lenders and mortgage options to consider based on your budget and your future goals. Give me a call, at 705-315-0516, or book a consultation with me at this link and together we will determine if now is the best time for you to refinance your mortgage while getting you the best rates available. 

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