By Matt Allen
Vice President, Portfolio Lending (NMLS #415037);

Is Now a Good Time To Refinance?

Oct 20, 2022

  • Cash-out Refinance
  • Rate and Term Refinance
  • Refinancing

As a homeowner, there are many reasons to consider refinancing your mortgage. It could get you a lower interest rate than the loan you currently have or save you money on interest. You might refinance the loan into a shorter term so that it’s paid off several years earlier than your original mortgage loan. Your existing mortgage may have been an adjustable-rate mortgage that you want to flip to a fixed-rate mortgage or the other way around. Or, you may wish to leverage the equity on your home to make a large purchase or consolidate other debt.

Whatever the reason for refinancing your mortgage, keep in mind that there are costs involved. In most cases, refinancing your mortgage could cost anywhere between 3% and 6% of the loan’s principal. You may also need to complete a few requirements, such as getting another appraisal, completing a title search, and paying for application fees on the new mortgage. Consider all these costs to ensure that refinancing your mortgage loan would be worth it. Let’s look at all these reasons individually.

Lowering Your Interest Rate

One of the most popular reasons to refinance a mortgage loan is to lower the interest rate on the existing loan. Some lenders say that a 1% reduction in interest could be enough to consider refinancing a mortgage loan. It is often best to consider refinancing your mortgage loan if you are getting at least a 2% reduction.

You may have purchased your home while rate conditions were much higher, and since that time, market conditions have changed. Lowering the interest rate on your home will help you save money and also help you build equity faster in your home. The portions of the monthly payment that goes towards your interest and principal payments will also be reduced.

Shortening your Loan’s Term

When market conditions lower interest rates on mortgage loans, this could be an opportunity to refinance. You may consider making a move to a shorter-term loan without changing your monthly payment significantly. A shorter-term loan decreases the amount of interest you will pay on the loan due to the shorter length of time you’ll be paying it back. Decreases in the mortgage payment are dependent on your loan’s original term and interest rate, and the new loan’s term and interest rate. There are several refinance calculators available that help you estimate your savings and payment amounts available online.

Converting an Adjustable-Rate or Fixed-Term Mortgage

Typically, ARMs will provide you with a lower interest rate than a fixed-term mortgage for the first few years of the loan. These types of loans have a fixed interest rate for several years, then will vary by market conditions. The interest rate could fluctuate every year, going up or down. The instability of your interest rate and mortgage payments is an excellent reason to consider converting an ARM to a fixed term.

If you have a fixed-rate mortgage and interest rates are falling, you might consider the opposite route and convert it to the ARM. The loan will adjust to these changes, eliminating the need for you to refinance with each rate drop. Still, this could be a risky strategy as there’s no definite way to predict when interest rates will rise and fall. ARMs are generally a good idea for homeowners who don’t plan to stay in their homes for a long time.

Tapping Into Your Equity

All the reasons above are financially sound reasons to consider refinancing your mortgage loan. If you want to tap into your home’s equity to pay for other debt or expenses, you will get what is called a cash-out refinance. Remodeling your home, which would increase its worth, would be a good reason to get a cash-out refinance. You may have other debt that you are paying at a higher interest, which you would like to consolidate at a lower interest rate available through refinancing your home. There might be an upcoming expense, such as financing a child’s education where other loan sources would incur a higher interest rate than home equity.

It’s always best to make sure that you are running your numbers when considering whether it’s the right time to refinance. Here's a calculator that can you determine if refinancing your home can benefit you. If you are ready to refinance your mortgage, give our experts at NASB a call at 855-465-0753 or click here for more information.