Want a lower rate? Here’s when you can refinance your home

The best time to refinance your home depends on a combination of personal factors and market conditions. Here are some key indicators that it might be the right time to refinance:

1. Interest Rates Drop Significantly

Refinancing is generally worth considering when current interest rates are at least 1% lower than your existing mortgage rate. Even a 0.75% reduction might make sense if the loan is large or if you can negotiate low closing costs.

A lower rate can save you thousands of dollars over the life of the loan by reducing your monthly payments and total interest paid.

2. You’ve Built Up 20% Equity

Check out what your home might be worth right now by looking at what similar houses in your area are selling for (or listing for, at least, to get a general idea). 

Now, let’s say you put 10% down when you bought a house a few years ago for $500,000 (i.e., you paid $50,000 and took out a loan for $450,000). But, in the last 3 years, that $500,000 house is now worth $600,000—meaning, you’ve gained an extra $100,000 without having to pay for it (just one of the reasons home ownership is so valuable).  But, here’s the big ta-da—that $100k also means you have more than 20% equity in the home so you can stop paying for private mortgage insurance. This could save you hundreds of dollars per month!

3. Your Credit Score Has Improved

If your credit score has gone up significantly since you took out your mortgage, you might qualify for better terms or lower interest rates, making refinancing more attractive.

4. You Need to Tap Into Home Equity

A cash-out refinance can be a good option if you need to access funds for home improvements, debt consolidation, or other expenses. It allows you to borrow against the equity in your home, often at lower rates than personal loans.

5. You Want to Switch Loan Types

If you originally took out an adjustable-rate mortgage (ARM) and your rate is about to adjust, refinancing into a fixed-rate mortgage can provide more stability and predictability in your monthly payments.

6. You Want to Shorten the Loan Term

Refinancing from a 30-year mortgage to a 15-year mortgage can help you pay off your home faster and save on interest, even though your monthly payment may increase.

7. You Plan to Stay in the Home Long Enough

It’s important to calculate your break even point — the time it takes to recoup your closing costs through savings. If you plan to stay in your home long enough (typically 2-5 years), refinancing could be a smart move.

How long do you have to be in your home before you can refinance? 

You don’t need to wait a specific amount of time before refinancing a mortgage, but most lenders prefer that you’ve had your current mortgage for at least 6-12 months. This period allows you to build enough equity in your home and establish a track record of timely payments. Additionally, having at least 20% equity is usually recommended to avoid private mortgage insurance (PMI).

Do I have to have 20% equity (ownership) of my home to refinance?

No, you don’t necessarily need 20% equity in your home to refinance, but it’s often recommended. Here’s how it breaks down:

  • Conventional Refinance: Typically, lenders prefer at least 20% equity (80% loan-to-value ratio). This helps you avoid paying private mortgage insurance (PMI), which adds to your monthly payment.
  • Less than 20% Equity: You can refinance with less than 20% equity, but expect to pay PMI or face higher interest rates. Some conventional loans allow refinancing with as little as 5% equity, though it depends on your lender and financial profile.
  • Government-backed Loans: FHA and VA loans offer more flexibility. For example, VA loans can allow refinancing up to 100% of the home’s value, and FHA loans may allow refinancing even if you have minimal or no equity.

So while 20% equity is ideal, it’s not always a hard rule. Many homeowners refinance with less if the financial savings or other benefits outweigh the costs.

Are there cons of refinancing too soon? 

Refinancing too soon can come with several downsides that may outweigh potential benefits. Here’s a breakdown:

  1. Closing Costs: Each refinance involves closing costs (2% to 6% of the loan), and if you refinance too frequently, these can add up quickly.
  2. Resetting Loan Term: Refinancing often resets your loan to a new 30-year term. Even with a lower rate, this means you may pay more in interest over time unless you pay off the loan early.
  3. Reduced Home Equity: Cash-out refinancing or rolling closing costs into the loan reduces your equity, which could limit financial flexibility or affect future borrowing.
  4. Prepayment Penalties: Some mortgages come with penalties if you pay off the loan early, including through refinancing.
  5. Credit Score Impact: Multiple hard credit inquiries from frequent refinancing can lower your credit score temporarily.
  6. Break-even Point: Refinancing costs take time to recover through savings. If you refinance again before reaching the breakeven point, you may lose money instead of saving.
  7. Lender Waiting Periods: Many lenders have “seasoning” requirements, typically 6 months, before they allow another refinance​.

When would I break even after  refinancing?

Let’s say you took out a $400,000 mortgage with a 7% interest rate, and now rates have dropped to 6%. You’re thinking about refinancing, but you want to know how long it will take to break even on the costs. Here’s how the numbers stack up:

  • Original Monthly Payment: $2,661
  • New Monthly Payment (at 6%): $2,398
  • Monthly Savings: $263
  • Closing Costs: Let’s assume closing costs are around 3%, which equals $12,000.

To break even, you’ll need to recover the $12,000 in closing costs through monthly savings. At a savings of $263 per month, it would take roughly 46 months (just under 4 years) to hit the breakeven point.

After that, you start reaping the benefits of your lower rate in pure savings. This example shows that while refinancing can offer monthly savings, you’ll want to make sure you stay in your home long enough to make it worthwhile.

What would my savings look like post refinancing? 

After hitting the breakeven point, here’s how much you’d save over the next few years:

  • 3 years after break-even: $9,468
  • 6 years after break-even: $18,937
  • 9 years after break-even: $28,405

These figures show how the savings stack up over time, making refinancing a smart long-term move if you plan on staying in your home for several years beyond the breakeven point. ​​

Can I refinance as often as I want?

In theory, you can refinance your mortgage as often as you want, but there are practical considerations to keep in mind:

  1. Lender Requirements: Some lenders might have specific policies or fees related to frequent refinancing. It’s essential to check their terms before proceeding.
  2. Costs vs. Savings: Each refinancing comes with closing costs and fees. You should carefully evaluate whether the savings from a new mortgage outweigh these costs. Frequent refinancing can erode potential benefits.

And if you’re feeling uncertain, don’t hesitate to talk to a lender who can help you navigate these complex dynamics. Give us a call at 737-510-2523

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.

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