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December 19, 2023

The monthly mortgage payment is typically the most significant expense for most households. You may consider a refinance if it’s stretching your budget thin each month. Or, if you want to access the equity in your home, refinancing could be an option to convert it to cash. 

While mortgage refinancing has several benefits, is it a wise move? Here’s a closer look at why refinancing could make financial sense and how to decide if it’s right for you. 


Reasons to refinance

Mortgage refinancing involves replacing your current home loan with a new one. Here are some key reasons why you may want to refinance:

  • Secure a lower interest rate. Has your credit score improved since you took out your mortgage? Or are the rates lower in the current market? Either way, you may get a better deal and save a bundle in interest. 
  • Lower monthly payments. You may be able to extend your loan term for a lower monthly payment. Remember that you'll pay more in interest over the life of the loan as the lender has more time to collect from you. 
  • Get a shorter loan term. Refinancing to a shorter term, like 15 or 20 years, can help you repay your mortgage sooner. This could be ideal if you can afford a higher monthly mortgage payment. 
  • Access cash from home equity. If you have a sizable amount of equity in your home, you may qualify for a cash-out refinance. This type of mortgage lets you pull out a portion of your equity in cash. It also replaces your current mortgage with a new one that includes the cash you withdraw. 
  • Convert to a fixed-rate mortgage. An adjustable-rate mortgage (ARM) may have been ideal when you first signed on your mortgage. But if the introductory-rate window is over, you can refinance to a fixed-rate loan. 


Considerations before refinancing

There are many advantages to refinancing your mortgage. Still, it’s not without downsides to evaluate when deciding if it’s right for you. These include: 

  • Closing costs. When you apply for refinancing, you'll get a loan estimate outlining the details of your new loan. It includes your new monthly payment, interest rate, and closing costs. Make sure you'll save enough to offset these fees. You should also have a sizable amount of cash to cover closing costs. (Note: The lender may allow you to roll these costs into the new loan). 
  • Length of time you plan to stay in the home. It takes years of savings to offset the closing costs, so you'll want to stay put long enough to recoup those costs. Be sure to conduct a thorough cost-benefit analysis. Factor in how long you plan to stay in the home and the potential savings from the new loan.
  • Your credit score. This number plays a significant role in the refinancing process. Homeowners with good or excellent credit usually qualify for the best rates. Improve your credit score before applying for a refinance if your credit score is on the lower end. Take some time to review your credit report and create a plan of action to boost your credit health. Also, dispute any inaccuracies that could be dragging your score down. 


Should you refinance your mortgage? 

Deciding whether to refinance your mortgage depends on your specific financial goals. It could make sense if you want to reduce your monthly mortgage payment to free up more funds in the short term. The same is true if you want to access cash for debt consolidation or to fund home renovations.

That said, meeting the lender's eligibility criteria is a must. It's also important to remain in your home long enough to capitalize on the cost savings.

However, refinancing won't make sense if you anticipate selling your home soon. The expenses of a refinance could outweigh the expected cost savings. Calculate the break-even point to make an informed decision.  


The bottom line

Refinancing can significantly lower borrowing costs associated with home loans. Be sure to crunch the numbers to determine if refinancing is best for your financial situation. Contact one of our experts if you need help with your decision-making.