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Should I Refinance My Home?

Rates are still quite low, but they are on the rise. Is now a good time to refinance? And what happens when you refinance your home?

February 9, 2022

For American households, spending on housing is the No. 1 biggest expense category overall. And the average mortgage payment is now $1,487 per month. 

With housing making up such a large percentage of Americans’ overall spending, this is one category that is vital to optimize.

For existing homeowners, one option to potentially lower housing costs is to refinance the mortgage. Ideally, this will result in a lower interest rate or a lower monthly payment amount. 

With rates relatively low by historical standards, you may be wondering — should I refinance my home? 

It’s a great question to be asking. Refinancing can potentially save you money or give you more flexibility, but it doesn’t make sense for everyone. Here’s what you need to know. 

Should I refinance my home?

The answer to this question depends on many factors. Specifically it depends on your goals for refinancing, your current mortgage rate and term and other factors. 

Here’s an overview of reasons to refinance — and some reasons to stick with your current mortgage.

Reasons to consider refinancing your home

To save money on interest. If your current mortgage is at an interest rate that is substantially higher than the refinance rates available today, it may make sense to refinance your mortgage. However, be sure to calculate the upfront costs of refinancing including loan origination fees, buying points and other costs. A common recommendation is to refinance if you can get a new rate that is at least 1% lower than your existing rate. 

To adjust the loan term. Some borrowers may wish to either shorten the loan term or lengthen it, depending on their financial situation. For instance, if you’re five years into a 30-year mortgage and get a substantial raise at work, you may wish to refinance into a 15-year mortgage. Conversely, if you are on a 20-year mortgage but your payments are creating too much financial strain, you may wish to refinance to a 30-year mortgage. 

To eliminate private mortgage insurance (PMI). If you have a loan that has private mortgage insurance because you had a down payment of less than 20%, refinancing may make sense. This is particularly true for FHA loan borrowers, who often need to refinance in order to eliminate PMI. 

To consolidate high-interest debt. By using a so-called “cash-out refinance,” borrowers can take advantage of their existing home equity to get cash. These funds can then be used to pay off high-interest debt, such as credit cards or personal loans. A home equity line of credit or home equity loan could be alternatives to this strategy.  

Note: If you have credit card debt to consolidate, another great option is to use Tally†. Tally may help qualifying Americans consolidate credit card debt and potentially save money on interest. Learn how Tally works here

Reasons not to refinance your home

When you’ve recently moved or plan to move soon. Refinancing comes with substantial costs — around $5,000 on average. Because of this, it generally doesn’t make sense to refinance if you’ve recently moved into your new home or if you plan to buy a different home soon. Use a break-even calculator to weigh your options. 

To facilitate unnecessary spending. You may be tempted to use a cash-out refinance to give you the cash for a luxury vacation, a new car or another unnecessary expense. This is generally a poor financial decision, as the typical goal is to build up equity in your home rather than spending it. 

To pay off your home faster when you haven’t optimized other financial goals. Paying off your home is a great plan, and the temptation is often to pay it off ASAP. However, if you haven’t started saving for retirement, or you have high-interest debt to pay off, it may be more financially effective to prioritize these goals first. 

To answer the question of should I refinance my home, you’ll need to weigh the factors above and also calculate exactly how much refinancing would cost upfront compared to how much you’d save over time.  

How often can you refinance your home? 

There is technically no limit on the number of times you can refinance a mortgage.

However, there are substantial costs associated with refinancing. The typical refinance costs around $5,000 on average, or around 2% of the loan’s value. 

Should I refinance my home if I’ve already refinanced recently? In most cases, no — unless rates have changed dramatically and you can get a rate that is at least 1% lower than your existing mortgage. 

How to refinance your home

The process is actually quite similar to the process you went through when originally applying for a mortgage. You will need to go through the lender’s application, underwriting and closing process. 

If you wish to stay with the same lender, contact them to discuss your options. If you’re switching to a new lender, you can go through their refinance application process, either online, over the phone or in person.

Before you refinance, be sure to run the numbers to ensure that it’s actually worthwhile to do so. Consider the closing costs, which may need to be paid upfront, as well as the difference in interest rates.

What happens when you refinance your home? 

When you refinance, you apply for a brand new mortgage. If approved, that new mortgage is used to pay off the existing (old) mortgage, leaving you responsible to pay the new mortgage. 

And like applying for any new mortgage, the lender will pull your credit report and analyze your income and debt. They will use your debt-to-income ratio and credit score to determine your creditworthiness to determine the rates they can offer you. 

Wrapping up

As with any big financial decision, whether to refinance or not takes careful consideration. 

It’s important to weigh all the pros and cons. It may seem worth it to refinance if you can simply get a lower interest rate. But after you account for the closing costs the rate will generally need to be substantially lower in order for refinancing to make sense. 

Likewise, refinancing to extend or shorten the loan term, or to take advantage of your home equity, also takes careful consideration. If you have questions or want personalized advice, it’s worthwhile to discuss your options with a financial planner or advisor. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.