Home Equity

Is Refinancing Good? 6 Cases Where Refinancing Makes Sense

By Tom Burchnell
refinancing good

We get it. The topic of refinancing is one that often comes with many questions and caveats. Can I afford the new payments? How much is this going to save me in the long run? Will I need to pay closing costs, and what will those costs be? There’s a lot to consider, so how do you know if it’s the right fit? In this article, we’ll go into mortgage refinancing and when it might be a good idea to help make your decision a little easier. 

What Is Refinancing?

A refinance is the act of revising your current mortgage and replacing the term or interest rate (or both) with a new one. The process involves your lender essentially paying the balance of your existing mortgage loan and creating a new agreement to take its place. 

There are two types of mortgage refinances:

  • Rate and term refinance: A lender turns the remaining balance of your current loan into a new loan, which generally results in a more favorable rate and loan terms.
  • Cash-out refinance: You liquidate some of the equity in your home, which creates a loan that contains both the balance of your mortgage plus the cash you took out.

So, how does refinancing work? The process follows a similar path to taking out a regular mortgage. You shop around to compare rates and terms from various lenders. Compare these factors to your existing mortgage to ensure refinancing makes sense. If it does, and you meet the lender’s requirements, you fill out an application and submit the necessary paperwork. 

If you’re approved, you will need to close on the refinance, which means you’ll also have to pay closing costs. Keep an eye on these and other fees that might come with your new mortgage.

Pros and Cons of Refinancing

If you’re considering a refinance, you should compare the pros and cons to make sure that it’s the best option for you.

Pros of refinancing include:

  • Obtaining a lower interest rate
  • Lowering your monthly payments
  • Increasing predictability
  • Shortening your term and paying off your mortgage faster

Cons of refinancing include:

  • Potentially increasing your monthly payments
  • Having to apply — and approval isn’t guaranteed
  • Having to pay closing costs and other fees
  • Getting your home appraised for a lower value if the market is down, which could affect your chances of approval

6 Cases Where Refinancing Makes Sense

The question then is, is refinancing good? It can be. Here are six situations in which refinancing might make sense for you. 

1. You Want to Lower Your Interest Rate (And Reduce Your Payments)

One of the most common reasons for refinancing is to lower the current interest rate of the loan, thereby lowering your monthly payment. In general, if you can reduce your rate by at least 2%, refinancing is a good idea. Some lenders say even a 1% reduction could result in savings over time. 

Keep the term of the loan in mind, however. While you may be reducing your monthly payments, you may extend the length of the mortgage, which means you could pay more in the long run. 

2. You Want to Switch Your Rate Type

Some people who refinance want to switch from an adjustable-rate mortgage to a fixed-rate one (or vice versa). ARMs typically begin with low rates but can increase gradually over time. With a fixed-rate mortgage, your rate never changes, no matter how much rates fluctuate. 

On the other hand, rates can decrease over time. They may even dip below what you’re currently paying on a fixed-rate mortgage. If rates continue to fall, switching to an adjustable-rate means that you won’t have to apply for a refinance every time the rates change. 

3. You Want to Change Your Mortgage Term

Most people who take out a mortgage opt for a 30-year fixed. While 30 years is typically standard, that’s a long time to be paying off a loan. You may choose to refinance your mortgage to get a shorter term, which means you’ll pay off your home faster. 

In many cases, shortening your term can increase your payments. The difference may be negligible, especially if you’re dropping your interest rate significantly. A small adjustment in the rate, however, could mean a much larger increase in your monthly payment. 

4. You Want to Tap Into Your Home Equity

With a cash-out refinance, you have the opportunity to tap into some (or most) of the equity you’ve built up over the years. The money you receive is yours to do with what you will. You can make home improvements, consolidate higher-interest debts, or make a large purchase. A cash-out refinance, however, means you’ll increase the total amount you owe, which means you’ll be paying off your mortgage for longer. 

5. You Want to Remove PMI Requirements

Some mortgages, like FHA and USDA loans, require you to pay private mortgage insurance, even after you’ve accumulated a substantial amount of equity in your home. Conventional mortgages, however, drop the requirement when you have at least 20% equity. Refinancing to a conventional loan, therefore, can help eliminate the PMI requirement, saving you money in the long run. 

6. You Just Went Through a Divorce

If you recently went through a divorce and you both signed the mortgage agreement, you might consider a refinance if one of you wants to keep the home. Divorce doesn’t automatically dissolve a home loan contract. Refinancing enables you to buy out the other person’s interest in the home, effectively resolving a joint home loan issue. 

Key Takeaways

The decision to refinance your mortgage loan is one only you can make. Assess your situation and consider your finances. For many, refinancing can prove to be a beneficial solution. If it doesn’t seem like the right one for you, you can always take a look at alternatives such as recasting and sale-leasebacks. No matter what you choose, be sure to speak with a financial advisor to compare your options carefully and ensure you can afford the payments and get the best deal possible.

Tom Burchnell
Written by Tom Burchnell
Director of Product Marketing

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.