4 Questions to Ask When Refinancing Your Mortgage

Refinancing a house can sound daunting or confusing. How does refinancing a mortgage work? What does refinancing a house mean? In simple terms, refinancing your home means replacing your current mortgage with a new loan, which you might do to lower your monthly payment, shorten the term of your mortgage or switch from an adjustable-rate mortgage to a fixed-rate mortgage. 

But while that might sound like a good idea, refinancing your home isn’t always the right choice. There are a lot of questions to ask: Is refinancing worth it? How much does refinancing a mortgage cost? Does refinancing hurt your credit? And is refinancing worth it in the first place?

If the costs of refinancing your home outweigh the savings, or the benefits don’t align with your long-term goals, then staying in your current mortgage may be a better option. And on consideration, you may discover that what you actually need is to talk to an advisor about how to lower mortgage payments without refinancing, or how to remove someone from a mortgage without refinancing. 

So, here are four questions to ask yourself before deciding to refinance your home.

And if you want help looking at how refinancing your mortgage affects your larger financial picture, reach out to Farm Bureau.

Question 1: Why Do I Want to Refinance?

What are your goals for refinancing your home? Do you want to change your mortgage payment? Pay off your house faster? Revise your financial situation in some other way? Be clear on what it is you’re trying to accomplish before you jump into refinancing. 

Here are three common reasons homeowners might choose to refinance their homes.

Refinance Reason 1: To Take Advantage of a Lower Interest Rate

If current mortgage interest rates are lower than your existing rate, your savings if you refinance at the lower rate can be considerable. Whether you’ll end up saving money depends on time — or rather, the total number of years that you’ll be paying off your mortgage. As a rule, the longer you’re in debt, the more interest you’ll pay, regardless of the rate. So paying off your mortgage faster by switching from a 30-year loan to a 15-year loan could slash your interest costs in half.  

Refinance Reason 2: To Get Out of an Adjustable-Rate Mortgage

The uncertainty that comes with an adjustable-rate mortgage, where your payment could jump hundreds of dollars from one month to the next, is a good reason to take advantage of refinancing at a fixed interest rate. 

Refinance Reason 3: To Lower Monthly Payments

A lower monthly payment doesn’t necessarily mean you’re saving money over time. However, if you find yourself in a situation where you’re struggling to pay bills, such as job loss or mounting medical expenses, refinancing at a lower monthly payment can help alleviate those financial stressors.

Question 2: How Much Equity Do I Have?

Another important factor to consider when refinancing your home is equity — that is, how much you’ve already paid into the mortgage. Mortgage loans that don’t have an 80% loan-to-value ratio require you to pay private mortgage insurance (PMI) each month.

PMI protects the lender in case you default, and these fees add to your monthly payment. You want at least 20% equity in your home before considering a refinance. The more equity you have, the less you pay throughout the duration of the loan.

Question 3: What’s the Age of My Current Mortgage?

Here’s how mortgages work: You primarily pay interest for the first few years, regardless of whether it’s a new mortgage or a refinance. So, if you only have 10 years left on your current loan, that’s great! You’ve been making good progress on chipping away at the principal balance.

But before you take a look at your home refinance options, consider this: If you start a new 15-year or 30-year mortgage, you’ll be back to making primarily interest payments. In that case, refinancing may not be the best option for you.

Question 4: Can I Afford to Refinance?

The fees associated with home refinancing rates add up. Closing costs comprise the biggest fees and can be as much as 5% of the loan amount. It’s possible to get these costs absorbed into the new loan, but this may raise your monthly mortgage payment, rendering the goal of a refinance moot. 

One option is to pay closing costs in full rather than financing them. This strategy helps you avoid having higher payments down the line, but it also means you’ll need to come to the table with cash. Consider all of these questions before deciding to refinance your mortgage.

Check Your Portfolio

Refinancing a mortgage affects more than just your monthly payments; it also impacts your overall financial portfolio. Reach out to Farm Bureau today to discuss your financial goals with an agent.