When Should You Refinance a Mortgage?

by Ryan Guina

In the United States, the average homeowner refinances their mortgage about every four years. People refinance for many reasons, including obtaining a lower interest rate, lowering monthly payments, changing from an adjustable-rate mortgage to a fixed rate mortgage, or to obtain equity for home improvements or other reasons.

Should You Refinance a Mortgage?

While there are many potential benefits of refinancing, it’s not always a good idea to refinance your mortgage. If you’re considering a refinance, here are a few things to consider:

Has your credit score improved?

Because your mortgage interest rate is determined partially based on your FICO credit score, if you know that your credit score has improved considerably since your mortgage loan was signed – it makes sense to consider refinancing your mortgage. The improved credit score should offer a better interest rate. The good news is that being approved for a mortgage can improve your credit score over time, as long as you make regular payments.

Are mortgage interest rates on the increase?

If you currently have an adjustable-rate mortgage (ARM) and you anticipate interest rates are increasing, you’ll want to try and switch to a fixed rate mortgage. When you have a fixed rate mortgage, your interest rate will stay the same throughout the course of the loan (unless you refinance it again later). If you already have a fixed-rate mortgage and interest rates are increasing, you probably will not want to refinance. Sometimes people refinance despite getting a higher interest rate if they need to take equity out of their home or change the term of the loan – maybe from 30 years to 15 years, so they can pay it off faster.

Click here to check Mortgage Rates in your area.

Are you having trouble making your payments each month?

If you’re struggling to make ends meet, it may be a good idea to refinance your mortgage if you can lower the interest rate or change the monthly payment amount to a lower amount. This can be done by refinancing the remaining balance on your mortgage loan to a new 30-year loan. The lower balance combined with a longer repayment term will reduce your monthly payments. If you qualify for a lower interest rate, you can decrease your monthly payment even more. (Read more about options for homeowners who can’t make the mortgage payments).

Do you need to consolidate other debts?

If you find your credit cards or loan payments have gotten out of control, you may decide to take some of the equity out of your home to pay off those debts. Once you have used the home’s equity to pay off debts, you’ll just have the one payment for your home each month to worry about. You’ll save money on interest payments most likely, and it makes it easier to keep track of payments.

Are you making more money?

Not all mortgage refinances are done to obtain a lower payment. In some cases, people get a higher paying job or get married and then have a two-income earning family. If you decide to put your higher income toward paying off your mortgage sooner, you may decide to refinance the mortgage and convert it to a 15-year amortization if it was originally set up as a 30-year amortization mortgage (Compare 15 Year and 30 Year Mortgages to see which is right for you). You’ll save tens of thousands of dollars interest, and you’ll own your home free and clear that much sooner.

Published or updated January 6, 2012.
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1 Doug Warshauer

Good list of issues to consider. One more issue to add might be if mortgage rates have decreased since you originally took out your mortgage, you may be able to refinance and reduce your payment at no cost. The option to do this is one of the great benefits of fixed rate mortgages.


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