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When Should I Refinance My Mortgage?

You’ve probably heard pitches and received letters in the mail touting the benefits of refinancing your mortgage. What does that mean for you? When you refinance your mortgage, you get a new home loan to replace your current one. The appeal is getting a lower interest rate, so you can save money on your monthly payment, or refinancing to access your home’s equity as cash.

Although mortgage rates have been increasing, a recent study by Black Knight found that 2.6 million homeowners could benefit and qualify from refinancing their mortgage. Here are the benefits to refinancing and how to figure out if it makes sense for you.

The Benefits of Refinancing a Mortgage

Refinancing your mortgage can help you get ahead financially in numerous ways, including:

  • Reducing your monthly mortgage payment by securing a lower interest rate
  • Paying off your mortgage faster with a shorter mortgage term
  • Paying down high-interest credit card debt by tapping into your home’s equity
  • Changing your mortgage term from adjustable to fixed to align with your current needs

Can You Qualify for a Refi?

To refinance, mortgage lenders will assess these factors to determine your eligibility: 

  1. The amount of equity in your home: Typically, lenders require at least 20% equity before you can refinance. If you’re not there yet, consider making an extra mortgage payment or paying more than your monthly payment to reduce your principal.
  2. A good credit score: If your credit score has decreased since you took out your mortgage, you may not qualify. Before you apply, improve your credit score. You may also want to consider tapping into a government program that can offer assistance, like FHA.
  3. Job and income stability: If you were unemployed or have switched jobs over the last several years, you might not qualify for a lower rate. Lenders also like to see that you have extra cash on hand in case you lose your job. They usually don’t reward homeowners with a lower mortgage interest rate who are living paycheck to paycheck or carrying significant credit card debt. If you’re in this position, consider a co-borrower and start building an emergency fund.

The Current State of Mortgage Rates

While everyone wants a lower rate, you might have noticed that rates are slowing increasing. To get an estimate on what your monthly mortgage payment could be, use our mortgage calculator and plug in the current mortgage rate. Also, keep in mind to look beyond the interest rate when comparing mortgages, as there’s more to the cost of a mortgage than the interest rate alone.

Does it Make Sense to Refinance?

Refinancing your home loan isn’t free. At a minimum, you’ll pay closing costs, attorney and bank fees. To find out if refinancing makes sense, calculate your break-even point to see how long it would take for the refinance to pay for itself in savings.

Here’s how it’s calculated: Break-even point (in months) = Refinance costs/monthly savings

Consider this example:

  • $4,400 in refinancing costs
  • $300 of monthly savings

Using the figure above, it would take 14.6 months to break even on the cost of refinancing. In general, if you plan to stay in your home for longer than the break-even point, refinancing could benefit you.

PA & NY Veterans - Refinance with a VA Loan

If you are a veteran, consider refinancing with a VA Loan, which some consider one of the best mortgages you can obtain because they are backed by the Department of Veteran Affairs, which means less risk to the lender. Typically, these home loans offer easier qualifications than conventional mortgages in regard to credit score, amount of home equity, and you don’t need to pay for mortgage insurance.

Here’s how veterans are eligible for the VA Financing program:

  • You have served 90 consecutive days of active service during wartime
  • You have served 181 days of active service during peacetime
  • You have more than 6 years of service in the National Guard or Reserves

Refi with an FHA Loan

If your credit score isn’t in the excellent range, or you have a high debt load and not that much equity in your home, an FHA Loan may help.  This is another home loan program that’s backed by the government, reducing lender’s risk in case of default.

Refinancing can help homeowners save money or obtain cash, but everyone’s situation is personal and unique. We encourage you to reach out to one of our friendly home loan experts in PA and NY to help guide you into the best mortgage and offer advice on if it makes sense to refinance.