Refinancing a home means swapping your old mortgage for a new one, resulting in better interest rates and/or a shorter payoff term. The lender for the new mortgage will pay off your old one and issue you a new loan with different conditions. Many homeowners may need to learn how refinancing a home works or what happens when you refinance your home, especially if it’s your first time owning a home.
How to decide when to refinance a home
If you’re thinking about refinancing, timing is key — but there’s no hard answer about when you should refinance your home. If you want to refinance, start by finding out when you can refinance your home. Many mortgages impose a waiting period of six months or more, while others allow you to refinance immediately if you want. If you can refinance, consider whether now is the best time to refinance your home. Optimal timing depends on several factors. The interest rate for your current mortgage, current home loan interest rates, and how much you can afford to increase — or how much you hope to save — on your monthly mortgage payments will play a role in your decision.
Consider the downsides of home refinancing: the out-of-pocket costs and the new higher monthly payment. Take advantage of low rates and consider switching from an adjustable mortgage to a fixed mortgage. Fixed mortgages establish a single, unchanging rate for the life of the loan. They can be more expensive overall but make it easier to budget because your monthly payments stay the same. Adjustable mortgages are below the current market rate for fixed mortgages but can go up or down over time.
What to know when refinancing your home
If you’re unsure about when you should refinance your home or want to know more about how refinancing a home, works, consider the following:
Don’t believe the home refinancing advertisements
If you see advertisements for crazy low rates, they probably won’t apply to most people. You can mostly ignore those ads and speak to a professional you trust. If it sounds too good to be true, it probably is.
Go in with flexible goals
If you start the process hoping for a lower monthly payment, you could soon realize that the effort to refinance might not be worth the small monthly savings. When we refinanced, we thought we’d tap into our equity to make home improvements. During the process, we learned that a separate line of credit that had nothing to do with the refinance would be a better fit.
The shorter the term, the lower the rate
When you refinance your home to shorten the mortgage term from 30 to 15 years, you can usually get the best mortgage rates. But going from 30 to 15 years — even at a better mortgage rate — will likely raise your monthly payments.
Refinancing a home takes a lot of time
Refinancing a home takes as much time as getting the original mortgage (minus the house shopping portion of the process) because it’s the same thing. You’ll need to gather your paperwork: tax returns, proof of income, bank statements, investments, debt, and savings. Even if you’re super organized, gathering all this information is a bit of a beast. It can feel like a full-time job for a week or more and then a part-time job until the new, refinanced mortgage is signed.
You may want to make a checklist of each document needed — not just general “tax documents” but a more specific “2015 tax return.” Consider digitizing your records and creating a “home refinance” folder on your desktop with each document needed. This takes time, so consider timing as an important element.
Budget for out-of-pocket costs
Beyond time spent, there are also out-of-pocket costs. You’ll likely need to pay for a home appraisal and possibly a home inspection. And you may have closing costs that need to be paid upfront. Sometimes the bank will absorb closing costs in the loan, but it depends on the situation.
Other considerations for refinancing a home
Before you decide, take some time to weigh all the possibilities and take stock of your current financial situation and prospects. Refinancing a home is a big financial step on par with buying the house for the first time, even if you don’t have to go through the process of closing on a home again. Like your first mortgage, refinanced mortgage rates will depend on your credit score and other financial circumstances, so it’s essential to have a realistic picture of your finances when deciding if you should refinance your home.