5 times to consider refinancing your mortgage (that have little to do with interest rates)

  • There are several situations unrelated to interest rates that could lead you to consider refinancing.

One common reason—even the primary reason—for people to refinance their home in recent years has been to take advantage of low interest rates. Now that rates have begun to edge up, is refinancing out of the question? Not by a long shot. Refinancing isn’t always just about the rate; the entire structure or term of your mortgage can change when refinanced. In fact, there are several situations unrelated to interest rates that could lead you to consider refinancing.

Scenario #1: You’re making more money and want to pay off your mortgage sooner.

When you were settling into your first home, paying your loan off in just 15 years may have seemed out of reach. But now, maybe you’re bringing home a larger paycheck and getting your home paid off faster is a more realistic goal. By taking on a shorter-term mortgage, you’ll pay less interest overall, even though your monthly payment may be higher. A refinance calculator can give you an idea of how much you’ll save in the long run and how much your monthly payment will change.

Scenario #2: You need to lower your monthly payments.

If lower mortgage payments would be a better fit for your current situation, you could consider refinancing to a longer term. Keep in mind: Extending your term will increase the time it takes to pay off your home, as well as the amount you’ll pay in finance charges over the life of the loan.

Scenario #3: You’ve gotten married or divorced.

If you’re a homeowner and have recently gotten married, you may want to refinance to add your spouse’s name to the title. On the other hand, if you’ve gotten divorced and either you or your spouse plan on keeping the home, a refinance may be in order to release the other from financial responsibility and any rights to the home. It’s less about money or time saved and more about making sure ownership goes to the appropriate party who is financially responsible for future payments.

Scenario #4: You have renovation plans.

Home values in the U.S. have risen 8 percent in the past year alone and are expected to keep rising.1 You may be able to take advantage of your potential increased home value and equity through a cash-out refinance, which essentially means signing a new mortgage for more than you actually owe and taking the difference in cash.2 You may then be able to finance those updates (think: finished basement, new bathroom) and make your house feel more like your family’s home.

A refinance does require closing fees, so you should speak with a loan officer to weigh the pros and cons for your own particular situation. Closing costs vary, but typically range from 2 percent to 5 percent of the loan amount. Also note that cash-out refinance availability and amount are both subject to loan-to-value ratio requirements and an appraisal will be required.

Cash-out refinance example:

Value of home: $250,000

Owed on existing mortgage: $156,000

Cash needed: $40,000

Closing costs: $4,000

You could potentially refinance the mortgage for $200,000 and receive a check for the balance, minus closing costs.

Scenario #5: I only need to budget for my down payment and monthly mortgage payments.

Calculators are a great way to gauge how much home you may be able to afford, but they don’t always paint the full picture of costs involved with buying and owning a home. In addition to your down payment, monthly payments, taxes, and insurance, you’ll need to budget for closing fees and other costs that come with homeownership. Think utilities, possible HOA fees, repairs, and regular maintenance. You also might want to factor moving costs and new furniture as a line item in your budget. Your mortgage lender can help you estimate these costs based on your situation.

1United States Home Prices & Values,” March 31, 2018, Zillow.

2Cash-out refinance not currently offered in Texas.

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