When to Refinance Your Mortgage

When you take out a mortgage to purchase a home, you finance it. When you replace a home’s existing mortgage with a new loan, you refinance it.

Refinancing is a common practice among American homeowners. Why do they go through the effort of uprooting their existing mortgages? And how do they decide when to refinance? Read on to discover what you should know before making such a major financial decision.

Refinancing: Pros and Cons

Everyone who refinances their mortgage does so with the expectation of one or more benefits. Potential upshots to refinancing include a lower interest rate (APR), lower monthly payment, and shorter payoff term. We’ll explain the possible benefits of refinancing shortly.

The potential advantages of refinancing are counterbalanced by an inescapable pitfall. These are closing costs, which include fees for underwriting, surveying and appraisal. Freddie Mac reports the average closing costs at around $5,000 – enough to sticker shock homeowners who are only entertaining casual interest in refinancing.

Take care that refinancing may ultimately lead to greater debt. If you refinance to liquidate equity in your home, then your decision only makes sound financial sense if you spend it on securities, education, another property, or some other form of investment. Furthermore, refinancing may negatively (albeit temporarily) lower your credit score.

Top 5 Reasons to Refinance a Mortgage

1. You want a lower mortgage APR. As you’re surely already aware, mortgage rates change over time. If the current APR is significantly lower than the one you originally agreed to, then refinancing can give you a lower monthly payment – as well as an opportunity to build faster equity in your home.
2. You want a shorter loan term. When mortgage rates are low, refinancing can shorten your loan term without significantly increasing your monthly payments. You may also refinance if you would accept higher monthly payments in exchange for a shorter loan term.
3. You want to access your home equity. The average American homeowner holds $315,000 in home equity. If you also have a sizable share of equity in your home – and want to liquidate it for emergency spending, or to pay off high-interest debt – then a cash-out refinance can help you accomplish your goal. Take care: Your new mortgage would have a higher loan amount.
4. You want to stop paying for private mortgage insurance (PMI). If you take out a conventional loan with a down payment of less than 20%, then your lender may require you to purchase PMI. It’s not for your benefit. PMI’s sole purpose is to compensate your lender in the event you stop making payments. You may stop paying for PMI if you refinance your home under one of two conditions: You have attained 20% equity in your home, or you have paid your loan balance down below 80% of your home’s original purchase price.
5. You want a different type of mortgage. When you refinance, you aren’t obligated to take out the same type of mortgage as you had before. That makes refinancing a potentially appealing option if you initially agreed to an adjustable-rate mortgage, and are discontent with how much its APR has increased over the years. Many homeowners refinance because they would prefer the predictability of a fixed-rate mortgage.

Would you like to ask a local expert whether refinancing is right for your unique financial goals? Then we welcome you to contact Sherburne State Bank or visit one of our locations in Becker, Monticello or Princeton, MN today!