When Does It Make Sense to Refinance a Home?

Millions of homeowners have the option to refinance their home, even if they don’t know it. Through refinancing, you can essentially end your original home loan and replace it with a new one, often with a lower interest rate and/or lower monthly payment.

But under what circumstances does it make financial sense to do this? What advantages could you enjoy?

The Potential Advantages of Home Refinancing

Most people who refinance are trying to achieve one (or more) of the following goals:

• Lowering monthly payments. Refinancing your home could leave you with lower monthly payments on your loan. If interest rates have gone down since you bought the home, you may qualify for a lower interest rate, representing both short-term and long-term savings. In the long run, this could save you thousands of dollars. You may also be able to get rid of your private mortgage insurance (PMI), reducing your monthly payments further and lowering what you pay for the house over the term of your loan.
• Paying the home off sooner. Some people refinance just so they can pay off the home quicker. If you’re currently in a 30-year mortgage, you may be able to convert to a 15-year loan, paying the loan off 15 years quicker and with less total interest paid (in exchange for higher monthly payments).
• Restructuring debt. It may also be advantageous to refinance the home if you’re in immediate need of cash, or if you’re restructuring your debt to be more advantageous. For example, if you have $100,000 in equity in your current home and $25,000 in credit card debt, you may be able to refinance, free up enough cash to pay off your credit card debt and increase your mortgage debt (which has a much lower interest rate).

Factors to Consider

So when does it make sense to refinance your home? Unfortunately, this is a complex question, and not one that can be summarily answered. To make the right decision, you’ll need to consider several factors, including:

• Your personal goals. What are you hoping to achieve by refinancing? You should have a specific goal in mind; otherwise, it will be difficult to tell whether refinancing is truly “worth it.” Are you hoping to change the term of your loan? Do you want lower monthly payments? Or are you trying to achieve some other financial goal, such as paying off a credit card?
• Current and prospective interest rate. What is your current mortgage interest rate and what are the current rates? Generally speaking, if you can reduce your annual interest rate by 1.0 percent, all other factors being equal, it will be beneficial to refinance. If you can reduce your interest rate even further, it’s even more appealing. If the interest rate is higher, you probably shouldn’t bother – and if it’s about the same, it may not be worth it. Also, consider whether this interest rate is variable or fixed; fixed rates are almost always favorable, since they’re locked in place and are therefore more predictable.
• Current and prospective term. How many years are left on your mortgage and what kind of term length is available to you? Lengthening the term could lower your monthly payments, while shortening the term could reduce your total interest paid and help you pay off your debt faster.
• Other debts and financial needs. Of course, you’ll also need to consider your other debts and financial needs. How much debt do you have in other areas? Do you need cash for a major expense, such as a new roof or sending a child to college? Refinancing could help you rearrange your finances to achieve your objectives.
• Closing costs. Home loan refinancing typically requires you to pay closing costs, often thousands of dollars’ worth. Calculate the specifics here; $5,000 in closing costs is easily worth it if you’re going to save $1,000 per year and continue living in this house for 10 years. The less money you stand to save, the tougher this math becomes.
• Time to refinance. You may also want to consider the time and effort it’s going to take to refinance. This is usually less intensive than securing a home loan initially, but it can still be a pain.
• Years remaining in home. How long are you going to continue living in this home? If you’re going to move in the near future, refinancing usually isn’t worth it. If you’re planning on moving soon, you’re better off looking for Arizona homes for sale and shopping for a new loan entirely. The longer you’re going to stay, the more advantageous refinancing can be.

Depending on your financial situation, home refinancing could be an amazing strategy that saves you money, a total waste of time and money, or something in between. It’s up to you to research the options available to you, weigh the pros and cons, and eventually come to the “right” decision for your needs.

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