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When to Refinance Your Mortgage

February 09, 2022
Exterior of a Brookfield Residential home at Poppy at Canvas Park in New Haven in Ontario Ranch, CA

It’s good to know some basics about the home refinance process even if you’re not currently considering the option. Refinancing your mortgage for the right reasons, at the right time, could save you a lot of money over the years. 

This guide can give you a better idea about when to refinance your mortgage.

Should I Refinance my Mortgage?

Refinancing a mortgage is the process of paying off your current mortgage with a new mortgage loan. You should only refinance when you believe it will better serve your finances over time. A lending professional can help you decide if it’s a good time for you to refinance.

You’re not locked in to your current mortgage. You can typically choose to refinance your loan at any time. In some cases, you may have to wait until six months after you signed on your current mortgage.

If you took out your current mortgage in recent years, be sure to check your loan papers to be sure there is no penalty for early repayment of your current mortgage. 

A Few Reasons to Consider Refinancing

Following are a few circumstances under which you might consider refinancing your mortgage:

  • When interest rates are lower than when you took out your current mortgage
  • When refinancing to have shorter or longer repayment terms could benefit your financial situation
  • When switching from one mortgage type to another type would benefit you

There are other circumstances in which refinancing could benefit your particular financial situation, which are detailed below.

The Refinancing Process

The home refinance process is similar to the process you went through to obtain your current mortgage. You’ll:

  • Contact a mortgage broker or lender
  • Submit an application
  • Provide requested documentation such as your updated financial
  • Wait for approval
  • Wait for the closing

Typically, refinancing a home is easier than securing a loan as a first-time homebuyer, especially when you’ve built up significant equity in your home. You can expect the refinancing process to take around 30 to 45 days, according to Rocket Mortgage.

When to Refinance Your Mortgage

Refinancing can be beneficial for a variety of reasons. You might consider refinancing if you want to:

  • Obtain a lower interest rate: This can lower the total amount of interest you pay over time.
  • Shorten the term of your mortgage: You may want to pay off your mortgage earlier. This could help you save on the total interest you’d pay.
  • Increase the term of your mortgage: If you want more time to pay off your mortgage or you want to lower your monthly mortgage payments, you could increase the length of your home loan.
  • Convert your mortgage from a fixed-rate home loan to an adjustable-rate mortgage: ARMs typically offer lower interest for an initial, fixed time period. When the fixed term is up, rates can increase or decrease, depending on the market. If you know you’ll be in your house short-term and you can lower your rate, this type of refinance might make sense.
  • Convert your mortgage from an ARM to a fixed-rate mortgage: If your ARM mortgage rates are likely to climb, you might refinance your mortgage to a lower fixed-rate mortgage.
  • Get funds to pay for something else, like debt or a financial emergency: You could access the cash value you’ve built up through previous mortgage payments (equity) and use it toward current expenses. This is called “cash-out refinancing.”
  • Use home equity to improve your house and potentially increase its value: You might also take cash out to upgrade your home and potentially increase its value. According to an August 2021 survey by Bankrate, 60% of respondents said the reason they tapped into home equity was for home improvements or repairs.

The Cost of Refinancing

A lending professional can help you shop for the best rates to save you money and advise you on whether it is beneficial for you to refinance your home.

You do not have to refinance your home with your current mortgage lender. There are fees associated with refinancing, which can vary depending on your financial situation and other factors.

Consider Closing Costs

The closing costs to refinance most mortgages is usually between 2% to 5% of the loan, according to Investopedia. The lender you use to refinance can provide a detailed cost statement to you.

When Is the Best Time to Refinance

A mortgage broker or lender can help walk you through potential scenarios so you can estimate your savings and possible return on investment. You can also compare lenders to see what types of rates are available to you.

Your situation is unique, so you’ll want to consider:

  • Your mortgage rate
  • The type of mortgage you have
  • How long you expect to live in your house

Consider how long you plan to stay in your home and how much your monthly savings could be when the home refinance process is complete. Calculate your total closing costs and compare those to what you’d be saving on a new loan to determine if it’s worth it.

Refinancing at the wrong time could result in extra costs for you. For example, depending on the value of your home during an appraisal, you may lack sufficient equity to satisfy a 20% down payment on your new mortgage. That could mean you’ll have to pay private mortgage insurance, which will increase your monthly payments.

A Mortgage Refinance Can Help You Achieve Your Homeownership Goals

When you own a home, it can help to be aware of your options, especially regarding your home loan. Refinancing can be a good idea to help you save a significant amount of money over time, but it’s not always the best option. Calculate your savings and research lenders to see what’s available to you.

For more helpful tips for homeowners, check out the Brookfield Residential blog.